“A lever for SMEs”: How new unfair contract laws will improve negotiation power for small businesses

A long-fought battle by small business advocacy groups to outlaw unfair contract terms was won on Tuesday, following a national agreement that will improve negotiation power for SMEs.

Assistant Treasurer Michael Sukkar announced that federal and state governments have agreed to amend consumer law so large enterprises will risk civil penalties if they use unfair terms in standard form contracts.

The new legislation will also clarify what a standard form contract is, protect more small businesses from unfair terms, and remove caps on the value of contracts.

Speaking to SmartCompany, barrister and Immediation founder Laura Keily says the amendments will “provide a lever for a small business to pull which can provide impetus for alternative dispute resolution”.

“If there’s a dispute, it will encourage big business to come to the table, because often, without a real threat of actual litigation, it’s very difficult to persuade them to negotiate.

“There’s nothing to force them to the table in a voluntary process of negotiation or mediation.”

According to Keily, the legislation will allow small businesses that have contract disputes with larger enterprises to negotiate without having to go to court.

“It gives them ammunition in their toolkit to negotiate … rather than necessarily being able to or wanting to go through a court process.”

Keily notes it is difficult to see how the proposed changes will provide relief to a small business taking its case to court, given legal representation is costly.

However, if a larger enterprise was to use an unfair contract many times over, then the Australian Competition and Consumer Commission could help start a proceeding on behalf of multiple SMEs, she adds.

For Law Squared director Demetrio Zema, the amendments will place “an additional burden on larger enterprises in their ongoing dealings with small businesses”.

“The proposed changes are likely going to require small businesses to get legal advice earlier,” Zema says.

Larger enterprises may need to “seek warranties or assurances” as part of their contractual negotiations to ensure small businesses have sought legal advice about the risks and obligations of a contract.

The precise penalties that will apply to businesses using unfair terms in contracts are yet to be determined.

Courts could take a variety of actions, according to Zema, such as overturning contracts, dismissing parties’ obligations under certain contracts, requiring repayments and financial penalties.

“Introducing a somewhat ‘level playing field’ is important, however, these proposed changes will place a further strain on business relationships,” Zema adds.