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
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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.
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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.
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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.
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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.
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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:
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(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.
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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.
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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
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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.
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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:
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(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.
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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).
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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
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(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
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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.
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