LEGALWISE Key Contract Drafting Seminar The Latest Cases and Legislative Changes You need to Know when Drafting Contracts. Alicia Hill Principal, McInnes Wilson Lawyers 3 September 2015 AHI:6128271_1 2 Commercial contracts are an inescapable aspect of conducting commercial dealings – from business sale contracts, shareholders agreements, supplier contracts, service provider contracts, joint venture agreements and employment contracts. While companies spend a significant amount of money to ensure their contracts are viable, in reality, very few contracts are ever perfect. Where there is uncertainty in a contract and disagreement between the parties to it, the courts are called upon to provide their view on how the deal that has been struck and documented should be interpreted and applied. Therefore, the way in which a clause, or communications between the parties in relation to the contract, or the contract itself is drafted, can determine the amount of time and money the parties to the contract may have to expend if a dispute about the contract arises. This paper will look at some recent cases that have considered exclusion clauses, preemptive rights clauses and formation of contract issues and then the latest legislative development that will affect contract drafting, if it is passed by the Commonwealth government, being the extension of the unfair contract term regime to small business. RECENT CASES 1. SANTOS OFFSHORE PTY LTD V APACHE OIL AUSTRALIA PTY LTD [2015] WASC 242 1.1 What this case considers This decision concerned the proper construction of a pre-emptive rights clause in a joint venture agreement and the validity of the notices issued purportedly pursuant to that clause. The pre-emptive rights clause was intended to confer on parties to the joint venture agreement a right to purchase the interest of a party in the joint venture in the event that that party proposes to transfer its interest to a third party. The Court was asked to intervene to confirm whether: 1.2 (a) the pre-emptive rights clause was sufficiently clear and certain to be capable of application; and (b) conditions placed in notices purporting to be a trigger of that clause complied with the drafted requirements in the clause. Key Facts In 2010, Santos Offshore Pty Ltd (Santos), Apache Oil Australia Pty Ltd (Apache Oil), Apache East Spar Pty Ltd (Apache East Spar) and Apache Kersail Pty Ltd (Apache Kersail) entered into two agreements. The first agreement was a Sale and Purchase Agreement (Spar SPA), by which Santos sold to each of the other parties an interest in a petroleum retention lease which it owned. This retention lease later converted into a petroleum production licence. The second agreement was the Spar Joint Operating Agreement (Spar JOA) which agreed on terms for the operation and exploitation of the retention lease/production licence under the joint venture. 2 AHI:6128271_1 3 Importantly, the Spar JOA contained the relevant pre-emptive rights clause (clause 12.3) which was set out as follows: 12.3(A) For the purpose of this Clause 12.3, the term Acquired Party shall refer to the Party that is subject to a Change in Control and the term Acquiror shall refer to the Party or third party proposing to acquire Control from a Change in Control. 12.3(B) Any Change in Control of a Party shall be subject to the following procedure. 12.3(C) Once the final terms and conditions of a Change in Control have been fully negotiated, the Acquired Party shall disclose the final terms and conditions as are relevant to its Participating Interest, including the date of the Change in Control, and its determination of the Cash Value of that Participating Interest in a notice to the other Parties. The notice shall be accompanied by a copy of all instruments or relevant portions of instruments establishing such terms and conditions and which will constitute, subject to this Clause 12.3, an offer to sell such Party’s Participating Interest to the other Parties. 12.3(F) Each other Party shall have a right to acquire the Participating Interest of the Acquired Party for the Cash Value on the equivalent terms and conditions set out in the Clause 12.3(C) notice for cash. No Party may acquire the Acquired Party’s Participating Interest pursuant to this Clause 12.3, unless and until completion of the Change in Control. If, for any reason, the Change in Control agreement terminates without completion, the other Parties’ rights to acquire the Participating Interest under this Clause shall also terminate. In a complex, multi-tiered corporate structure, Apache Energy Ltd (Apache Energy) held all of the share capital and voting rights of Apache Oil, Apache East Spar and Apache Kersail and in turn, a group of companies (the Apache Group) held all of the share capital and voting rights in Apache Energy. In April 2015, the Apache Group and certain other companies, entered into an agreement with Viraciti Energy Pty Ltd (Viraciti), by which Viraciti agreed to purchase inter alia all of the shares and voting rights in Apache Energy. This sale would result in a change in control, within the meaning of the Spar JOA, for each of Apache Energy’s subsidiaries. Accordingly, on 15 May 2015, Apache Oil, Apache East Spar and Apache Kersail issued a notice to Santos which purported to comply with the requirements of the pre-emptive rights clause of the Spar JOA. Santos argued that some of the conditions contained in the notice failed to comply with that pre-emptive rights clause. 1.3 The Decision Pritchard J, in the Supreme Court of Western Australia, identified that the dispute revolved around the proper construction of clause 12.3 in the Spar JOA. Her Honour started by considering the subject matter of clause 12 as a whole, highlighting that it creates a right for the other parties to the Spar JOA to pre-empt the transfer of the Participating Interest, or the change in control as it affects the Participating Interest, and to acquire that Participating Interest for itself. 3 AHI:6128271_1 4 Her Honour recognised the purpose of such clauses in joint venture agreements, adopting Hargrave J’s description in Beaconsfield Gold NL v Allstate Prospecting Pty Ltd,1 as: ‘pre-emptive rights operate to ensure that existing participants are empowered to exclude new participants by purchasing the outgoing participants interest if they so desire. They also permit a joint venturer … an enhanced opportunity to reap the rewards from past risk-taking and expenditures.’ Accordingly, Her Honour recognised there is a need for caution in adopting a construction which would restrict the operation of pre-emptive rights clauses or permit their application to be avoided. Pritchard J identified four key questions which she would be required to determine in relation to the meaning and application of the terms of clause 12.3: (a) what is the meaning of the phrase “the final terms and conditions as are relevant to its Participating Interest“ in cl 12.3(C); (b) what is the meaning of the phrase “on the equivalent terms and conditions set out in the Clause 12.3(C) notice“ set out in cl 12.3(F); (c) Does the phrase “on the equivalent terms and conditions set out in the Clause 12.3(C) notice“ in cl 12.3(F) apply to the identification of the terms and conditions set out in the cl 12.3(C) notice; and (d) Is cl 12.3 uncertain and therefore unenforceable? Firstly, Her Honour reached the conclusion that the words “such terms and conditions as are relevant to its Participating Interest” should be construed as requiring a close connection between the terms and the Participating Interest. Accordingly, the terms and conditions which are relevant to the Participating Interest will be those which bear upon, or operate upon, or are otherwise closely connected or related to, the Participating Interest and to its acquisition by the acquiring party. With respect to the second and third questions, Her Honour concluded that the preferable construction of the phrase “on the equivalent terms and conditions set out the Clause 12.3(C) notice for cash” operates in relation to the determination of consideration to be paid for the Participating Interest. This construction was supported by Her Honour referring to the immediate context in which the phrase appeared, as clause 12.3(F) broadly concerned consideration. The “equivalent terms and conditions” was held to recognise that the terms and conditions in the notice, in so far as they have a bearing on the consideration to be paid, must be understood as applying so as to result in an equivalent cash price for the acquisition of the participating interest. Her Honour also held that the only modifications which could be made to the terms and conditions from the change of control transaction agreement, were modifications to reflect the fact that the offer constituted by the terms and conditions in the notice is an offer to sell the Participating Interest only, as opposed to the whole company, and modifications to make clear the Participating Interest will be acquired for cash, rather than on the basis of such other form of consideration as may have been contemplated by the change in control transaction agreement. 1 [2006] VSC 320. 4 AHI:6128271_1 5 Finally, Pritchard J held that clause 12.3 was not uncertain, as the words she found had a clear meaning. Her Honour concluded that clause clearly outlines the means for identifying the terms and conditions of a change in control transaction agreement which will constitute the offer to sell the acquired party’s Participating Interest to the other parties to the Spar JOA. Pritchard J then considered whether each of the conditions challenged by Santos in the clause 12.3 notice failed to comply with the requirements of that clause. Her Honour found that all of the following conditions failed to comply with the requirements for clause 12.3: (a) a condition adjusting the purchase price of the Participating Interest at the date of competition; (b) a condition requiring Santos to acquire all of the Participating Interests, being the interests of Apache Oil, Apache East Spar and Apache Kersail; (c) a condition indemnifying the acquired party against all costs and liabilities in respect of the Participating Interest; and (d) a condition requiring Santos to assume any payment obligation of the acquired party under the Spar JOA. Accordingly, Pritchard J made declarations that each of the notices were wholly invalid and that the invalid conditions could not be severed from the notices. The ultimate effect of the decision was that Apache Oil, Apache East Spar and Apache Kersail would have to issue new notices that complied with clause 12.3 of the Spar JOA 2. VANTAGE SYSTEMS PTY LTD V PRIOLO CORPORATIONS PTY LTD [2015] WASCA 21 2.1 What this case considers This decision concerned whether a binding agreement for lease after an exchange of communications despite no formal documentation being signed by the parties. In particular whether the revised lease proposal and the relevant emails sent by Vantage to Priolo’s agent constituted a binding agreement for lease. 2.2 Key Facts By a written agreement dated 6 August 2003, Vantage Systems Pty Ltd (Vantage) leased part of an office building from Gamol Pty Ltd (Gamol) for a period of three years, commencing 1 July 2003. Gamol also granted Vantage a licence to use six car bays on the property. Vantage sub-leased part of the premises to a third party. Vantage exercised its option to renew the lease under the written agreement, extending the lease and the licence for an additional three years expiring 30 June 2009. In December 2007, Priolo Corporations Pty Ltd (Priolo) became the registered proprietor of the premises. 5 AHI:6128271_1 6 In May 2009, there were discussions between Priolo’s commercial leasing agent and Vantage concerning the possibility of a new lease of the premises being executed upon the expiry of the original lease, as extended by the option to renew. Priolo’s agent sent Vantage a proposal for a new lease, which was not acceptable to Vantage due to the amount of rent payable and the period for which a bank guarantee was provided. On 4 June 2009, after a series of communications, Priolo’s agent emailed Vantage attaching a revised proposal for a new lease stating ‘can you please confirm in writing that this proposal is acceptable to Vantage and we will arrange for [Priolo’s] solicitors to prepare the draft documentation.’ Importantly, the revised proposal contained all of the essential terms for an agreement for lease, despite containing a material error that the licence fee for the six car bays was $375 per bay per annum, when it should have stated that the fee was $375 per bay per month. Vantage responded to the revised proposal by stating that it was happy with the terms of the proposal and that ‘we should be good to start wrapping it all up’, however, it would also require the sub-lessee’s acceptance. Shortly thereafter Vantage sent another email stating the sub-lessee had approved the revised lease proposal. Accordingly, Priolo instructed its solicitors to prepare the draft lease and car parking documentation, which was sent to Vantage on 2 July 2009. However, Vantage did not sign the new lease and car parking documentation due to being unhappy with the terms, in particular, the ‘make-good’ clause. 2.3 The Decision The trial judge concluded on the balance of probabilities that Priolo and Vantage intended to enter into a binding agreement for lease by the acceptance of the revised proposal by Vantage. The trial judge further found there was a sufficient meeting of minds for there to be a binding agreement for lease. The fundamental issue that the Court of Appeal was asked to determine was: did the parties intend that, upon Vantage accepting the revised proposal, they would be bound immediately and exclusively by the express and any implied terms of the revised proposal, while expecting to execute a formal lease and licence agreements in substitution for the earlier agreement which would contain, by consensus and after negotiation, additional terms. Vantage argued that the revised proposal, as accepted by Vantage, was within the third class in Masters v Cameron, namely one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract. Buss JJA, with whom McLure P and Newnes JJA agreed, highlighted that whether a completed and binding agreement had been made was to be assessed objectively. Accordingly, Buss JJA held, on an objective assessment, that upon Vantage accepting the revised proposal the parties intended that: 6 AHI:6128271_1 7 (a) there should be a concluded and binding agreement to lease the Premises and take a licence in respect of six car bays; (b) the parties would be bound immediately and exclusively by the express and any implied terms of the revised proposal; (c) the concluded and binding agreement to lease the Premises and take a licence in respect of six car bays would in due course be superseded by formal lease and licence agreements to be prepared by Priolo’s solicitors and executed by the parties; and (d) the formal agreements would be in the form of Priolo’s standard lease and licence agreements, but those standard agreements would be amended to incorporate the express terms of the revised proposal and any other provisions which may, by negotiation, be agreed upon between the parties. The Court of Appeal reached this conclusion by concluding: 2.4 (a) at the time Vantage accepted the revised proposal, Vantage had been in occupation of the Premises for 6 years and was very familiar with the Premises, including the standard of the fixtures, fittings and services and the suitability of the Premises for Vantage’s business services; (b) Vantage was in a position to make a decision based on practical experience (from prior dealings) whether Priolo and Priolo’s agent were reliable and trustworthy commercial entities; (c) at the time when Vantage accepted the revised proposal, Vantage had not identified any other office Premises which it might lease and was not endeavouring to locate alternative premises despite the lease about to expire; (d) the sub-lessee had informed Vantage that it approved of the revised proposal; (e) the revised proposal embodied all terms that were legally necessary to form a contract; (f) the revised proposal did not involve Priolo or Vantage accepting any provisions that were materially more onerous or less advantageous, from a legal or commercial perspective, than those contained in the original lease as renewed; and (g) the failure of the parties to agree upon the ‘make-good’ clause is not inconsistent with an objective assessment that the parties intended, upon Vantage accepting the revised proposal, there should be a concluded and binding agreement. Rather the consequence was that the parties were bound by the express term in the revised proposal with respect to Vantage’s obligation to ‘make-good’ the premises and any other provisions with respect to repair, maintenance or reinstatement which might be implied. Further interesting issue Vantage also argued in the Court of Appeal that Priolo should not have had leave to amend its statement of claim after the close of each party’s case at the trial to seek an order for rectification of the revised proposed to correct the mistake in relation to the licence fee payable for the car bays. Further, Vantage claimed that the trial judge erred in law in allowing a claim for rectification of the revised proposal. 7 AHI:6128271_1 8 Both of these grounds were dismissed briefly by Buss JJA and were not significant issues in the decision. 3. ALAMEDDINE V GLENWORTH VALLEY HORSE RIDING PTY LTD [2015] NSWCA 219 3.1 What the case considers This case considers whether an exclusion clause had been sufficiently well drafted to preclude liability for personal injury incurred after participation in an inherently dangerous activity. 3.2 Key Facts The appellant, an 11 year old girl, was injured when she fell off her quad bike at the respondents’ recreational facility at Glenworth Valley in New South Wales. The injury occurred while the appellant was being led around a “purpose built quad biking track” by an instructor employed by the respondents. The appellant commenced proceedings claiming that the respondents were liable to her in negligence and for their non-compliance with the guarantees relating to the supply of services under ss 60 and 61 of the Australian Consumer Law, being Schedule 2 of the Competition and Consumer Act 2010 (Cth). The respondents argued that their liability was excluded by virtue of a form the appellant’s sister had signed upon arrival at the facility which included statements acknowledging risk. This statement being: “A. As a potential participant, you acknowledge and accept that recreational activities including but not limited to abseiling, kayaking, quad biking and other adventure activities (‘the activity’) constitute a dangerous recreational activity pursuant to the Civil Liability Act, 2002 and that participation in the activity involves a significant risk of physical harm or personal injury including permanent disability and/or death. Any such injury may result not only from your actions including physical exertion but also from the action, omission or negligence of others. B. You further agree that GVOA including its officers, employees or agents shall not be liable to any person whether in contract, tort, under statute or otherwise for any injury, loss, damage, death, economic loss whatsoever suffered by you, whether consequential, direct or indirect, caused by or connected with your participation in the activity (collectively referred to as the ‘harm’)”. There was also a sign displayed in the area where the group waited about quad bikes being an “inherently dangerous activity” and that riding was “entirely at your own risk”. 3.3 The Decision The Court considered whether the acknowledgement and signage effectively excluded the respondent’s liability. (a) Exclusion clause and liability: At first instance, the primary judge found that the respondents were negligent and the warning sign did not exclude their liability because it was only observable to the appellant after her mother had contracted for the activity on the previous day. 8 AHI:6128271_1 9 However, his Honour found that the application form signed on the appellant’s behalf formed part of the contract and, as a result of the breadth of its exclusion clauses, excluded the respondents’ liability. On appeal, the Court held that the alleged exclusion clauses were void. The respondents were liable to pay the appellant compensation under the Australian Consumer Law as a result of the respondents’ failure to comply with the guarantee given to the appellant that they would perform their services with due care and skill. A further reason for concluding that the respondents did not exclude their liability to the appellant is that exclusion clauses are not ordinarily construed so as to extend to the consequences of the defendant’s negligence unless the clause refers to that basis of liability. The only reference to negligence in the application form is in the following sentence contained in the warning clause: “ … Any such injury may result not only for your actions including physical exertion but also from the action, omissions or negligence of others”. The Court said, even if construed contra proferentem, this provision should not be read as extending to cover the respondent’s negligence. The Court thought the reference to the “negligence of others” was a reference, at least primarily, to the negligence of other participants in the various recreational activities. Of particular importance is the Court’s statement at paragraph [67]: The allegedly contractual exclusion clauses purport to exclude, and therefore would on their face have excluded, the respondents’ liability under s 60 of the Australian Consumer Law because the exclusions state that they extend to liability “under statute”. If they do extend that far, s 64 of the Australian Consumer Law would prima facie have rendered them void to that extent but s 139A of the Competition and Consumer Act would have excepted them from the operation of s 64, leaving them operative. In other words, if they purport to exclude relevant liability, both statutory provisions would apply. If they do not, neither statutory provision applies but liability would not be excluded because the contractual terms are not framed widely enough to do so. As I have said, I do not consider that they are so framed. 3.4 Further Interesting Issue A sub-issue in this case was when the contract was made. The two options were when the appellant’s mother booked and paid for the activity or when they attended the facility and signed the form. The Court held the contract was made when the appellant’s mother booked and paid for the activity. Therefore, the sign that was evident to them on their arrival at the facility did not form part of the contract, which had already been made. 4. GROCON CONSTRUCTORS (VIC) PTY LTD V APN DF2 PROJECT 2 PTY LTD [2015] VSCA 190 4.1 What this case considers This concerned leave to appeal from a decision of the trial division that Grocon Constructors (Vic) Pty Ltd (Grocon), as building contractor, breached its obligations to its 9 AHI:6128271_1 10 Principals, APN and Scots Church or whether APN and Scots Church breached its obligations, under a contract for the design and construction of a building at 150 Collins St, Melbourne. One of the fundamental issues on appeal was whether the definition of ‘Actual Trade Costs’ contained in the design and construct contract being “actual traded, supplier, consultant or subcontract costs payable” meant an amount that was to be paid or actually “paid“.2 4.2 Key Facts Grocon refused to provide certain records to APN to enable APN to verify costs actually paid by Grocon in completing the Project. APN considered this a breach of the terms of the building contract and refused to pay until the information was provided to determine if the amounts claimed were actual payments made or yet to be made and thus, on their interpretation, not yet payable. 4.3 The Decision The Court of Appeal started by reviewing the case law on the construction of commercial contracts, noting the most recent authoritative High Court statement of the principles for interpreting commercial contracts in Electricity Generation Corporation v Woodside Energy Ltd,3 whereby the court reaffirmed the objective approach to construction stating: “The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean … it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”.” Additionally, the Court of Appeal recognised the rule in Codelfa Constructions Pty Ltd v State Rail Authority (NSW),4 namely that evidence of surrounding circumstances is admissible to assist in the interpretation of a contract only if the language is ambiguous or susceptible to more than one meaning, however did not consider it necessary to consider the status of this rule, as the phrase in question is ambiguous. Further, the only surrounding circumstance upon which the parties relied was one of the transaction documents to which Grocon was not a party. The Court of Appeal also reiterated that there were two other relevant principles of contractual interpretation. (a) Firstly, the rebuttable assumption that if parties to a carefully drafted agreement have used the same word more than once, they will be taken to have intended that the word has the same meaning each time. (b) Secondly, the recitals to an agreement can assist in the construction of a contract, however, the recitals are not operative terms thus cannot override operative words if the words are clear and unambiguous. 2 Note there were other issues including whether a term could be implied into the contract which were less relevant for the paper and thus omitted from this discussion. 3 (2014) 251 CLR 640. 4 (1982) 149 CLR 337. 10 AHI:6128271_1 11 The Court rejected the trial judge’s finding that “payable” should be construed to mean “paid” and found that the phrase “actual trade, supplier, consultant or subcontract cost payable by [Grocon]” meant costs incurred by Grocon irrespective of whether the costs have actually been paid. This interpretation was consistent with the decision of Young J in Christopher Chronis Designs Pty Ltd v Citadin Pty Ltd5 which provided that “payable” encompasses both a legal liability to pay (which has not been paid) and a cost that has been paid, depending at what point in time it is applied to a cost. 5. LEGISLATIVE DEVELOPMENT 5.1 The existing unfair contract terms regime The Australian Consumer Law (ACL) protects consumers from unfair contract terms in standard form contracts. Recently, after a consultation process in mid-2014, the Government introduced the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Bill). This Bill proposes to extend the unfair contract term provisions contained in the Competition and Consumer Act 2010 (Cth) (CCA), Schedule 2 Australian Consumer Law (ACL) to small businesses as defined in the Bill. 5.2 What is an unfair contract term? The ACL currently contains unfair contract term provisions in relation to standard form consumer contracts which is located in Chapter 2, Part 2-3 of the ACL. A consumer contract is defined in section 23 of the ACL as being: ‘a contract for a supply of goods or services or a sale or grant of an interest in land to and individual who acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.’ The key provision of the unfair contract terms regime is section 23(1) of the ACL which relevantly provides that a term of a consumer contract is void if the term is unfair and the contract is a standard form contract. Accordingly, the unfair contract terms regime requires consideration of a number of different issues, including: 5 (a) whether the term or contract in question is not subject to the unfair contract term regime under the ACL; (b) whether the contract in question can be categorised as a standard form contract; and (c) whether a term of the contract is unfair. (1997) 8 BPR 15. 11 AHI:6128271_1 12 5.3 Is the contract a standard form contract? The ACL does not expressly define what amounts to a ‘standard form contract’, however, the legislation employs a rebuttable presumption supplemented by factors the court must take into account in determining the issue. Pursuant to section 27(1) of the ACL, if a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form unless another party proves otherwise. In determining whether the contract is a standard form contract, the court may take into account such matters as it thinks relevant, however, must take into account whether:6 (i) one of the parties has all or most of the bargaining power in the transaction; (ii) the contract was prepared by one party before any discussions relating to the transaction occurred; (iii) one party was, in effect, required to accept or reject the terms of the contract in the form presented; (iv) one party was given an effective opportunity to negotiate the terms of the contract; and (v) the terms of the contract take into account the specific characteristics of another party or the particular transaction. Standard form contracts are commonly used and are often more time-efficient and cost effective, as they avoid the transaction costs associated with negotiation contracts. However, they are often offered on ‘take it or leave it’ basis, meaning they can be onesided, with no opportunity to negotiate and terms are often embedded in fine print. The unfair terms provisions seek to prevent detriment arising from these kinds of issues. 5.4 Is the term of the contract unfair? In order for the term of the standard form consumer contract to be void under section 23 of the ACL, the term must be unfair. Section 24 of the ACL establishes a three-limbed test for determining unfairness, in that a term of a consumer contract is unfair if: (a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and (b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and (c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied upon. It is presumed a term of a consumer contract is not reasonably necessary in order to protect the legitimate interests of the party advantaged by the term, unless that party proves otherwise.7 6 ACL s 27(3). 12 AHI:6128271_1 13 The Court has discretion under section 24(2) to take into account such matters as it considers relevant, but must take into account the extent to which the term is transparent and the contract as a whole. A term will be deemed transparent if it is expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term.8 Section 25 of the ACL actually provides an extensive list of examples of terms which may be considered unfair, some key ones include: 5.5 (a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract; (b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract; (c) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract; (d) a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning. Proposed reforms The Bill proposes to amend the CCA and the ASIC Act to extend the application of unfair contract term provisions to small business contracts. The Government has introduced these changes on the basis that small businesses often lack the resources and/or power to understand and negotiate contract terms, resulting in a potential for detriment where unfair contract terms are enforced in standard form contracts.9 A small business may not always have the knowledge or understanding to identify an unfair term, or if they do, may feel like they have little choice but to accept the contract if they feel it is the only avenue to the commercial opportunity they are seeking.10 The reforms will allow unfair contract terms in small business contracts to be declared void. They aim to promote fairness in contractual dealings with small business with regard to standard form contracts.11 5.6 Who will be affected? As outlined above, the reforms extend the application of unfair contract term provisions to small business contracts. This raises the question: what is a small business contract? A contract will be a ‘small business contract’ under the CCA if:12 (a) The contract is for a supply of goods or services, or a sale or grant of an interest in land; 7 ACL s 24(4). ACL s 24(3). 9 Explanatory Memorandum, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth) 7. 10 Ibid 33. 11 Ibid 40. 12 Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth) cl 31, proposed s 23(4) of CCA. 8 13 AHI:6128271_1 14 (b) At the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; (c) Either of the following applies: i. the upfront price payable under the contract does not exceed $100,000; ii. the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $250,000. The ‘upfront price’ is the consideration that is provided, or is to be provided, under the contract and disclosed at or before the time the contract is entered into.13 The definition of ‘small business contract’ proposed to be added to the ASIC Act 14 is exactly the same, except it contains no requirement that the contract be one for a supply of goods or services, or sale or grant of an interest in land. However, the standard form contract would have to be one that is a financial product or a contract for the supply, or possible supply, of services that are financial services.15 Regarding the threshold of 20 employees, in counting the persons employed by a business, a casual employee is not to be counted unless they are employed by the business on a regular and systematic basis.16 The threshold of 20 employees, was chosen as it has been found by the Australian Bureau of Statistics to provide a good proxy of small businesses.17 These changes mean that the unfair contract term provisions will apply to consumer contracts and small business contracts. These changes do not impact the availability of the existing protection for consumers, even if there is an overlap, for example, if the parties to the contract include a consumer and a business.18 It should be noted that the unfair contract term provisions only apply to standard form contracts. This means small businesses will still need to negotiate, and be wary of, any unfair terms in day-to-day transactions which do not take place via a ‘standard form’ contract. 5.7 What will happen if there is an unfair term in a small business contract? Under the proposed changes to the CCA, the Court will be able to declare that a term of a small business contract is an unfair term, on application by: (a) A party to the contract, if the party was a ‘small business’ at the time the contract was entered into; or (b) The regulator.19 If a contract term is declared unfair, then it will be considered void. 13 ASIC Act 2001 (Cth) s 12BI(2); ALC s 26(2). Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth) cl 8, proposed s 12BF(4) of ASIC Act. 15 Ibid cl 17, proposed s 12GND(3) of ASIC Act. 16 Ibid cl 8 & 31, proposed s 12BF(5) of ASIC Act and proposed s 23(5) of ACL. 17 Ibid 11. 18 Explanatory Memorandum, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth) 9. 19 Ibid cl 46, proposed s 250(2) if CCA, 14 14 AHI:6128271_1 15 5.8 Status of the Bill The Bill was introduced and read for the first time on 24 June 2015, however, at this stage there has been no further progress of the Bill. If enacted, there will be a six-month transition period before the new laws take effect.20 While the Bill has not yet been finalised, if the legislation is enacted in its present form, it will be expected to commence in early 2016. 6. CONCLUDING THOUGHTS Despite the relative settled nature of the law in respect to contracts there maintains an body of cases requiring determination raising arguments relating to formation of contract, interpretation of clauses, and evaluation of conduct performing or purporting to perform a contract. Legislative developments also continue to impact on drafting content for contracts and can dramatically impact on expected outcomes for the unwary. Care, attention to detail and consideration of what is sought to be achieved when drafting remain requirements for all those preparing contracts. 20 Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth) cl 2. 15 AHI:6128271_1