SMEs given extra banking protections under new contracts law

Unfair standard form contracts legislation that protect consumers will be extended to include small businesses from November this year. The new law will cover businesses that employ fewer than 20 people where the upfront price payable under the contract is no more than $300,000, or $1 million if the contract is for more than 12 months.

Standard form contracts are those where there is little or no room to negotiate terms and conditions. They are frequently offered to small businesses by large suppliers such as telcos, lenders and insurance companies on a “take it or leave it” basis.

Under the new law, the courts will be able to strike out any unfair contract term that:

• would cause a significant imbalance in the parties’ rights and obligations;
• is not reasonably necessary to protect the interests of the party who would be advantaged by the term; and
• would cause detriment to a party if the term is relied on.

An example of an unfair term might be where one party but not the other is able to avoid, limit or vary their obligations or even terminate the contract. Other examples might involve excessive or hidden fees and costs in the event a contract term is breached or the contract is terminated. If a court finds that a term is “unfair”, that term will not be binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

This is a welcome additional level of protection for SMEs, who according to the Australian Competition and Consumer Commission enter into an average of eight standard contracts a year.

“Almost two thirds of small businesses have claimed to have experienced unfairness in the contract terms and conditions and almost half report experiencing some harm as a result” says ACCC deputy chair Dr Michael Schaper.

What it means for SME lending

A particular area that is likely to come under greater scrutiny is SME lending. This law affords SMEs some protection and redress from financiers that might look to take advantage of time poor, cash strapped and financially inexperienced small business operators.

Banks and non-bank lenders may find themselves under challenge for loans they make to SMEs where contracts include unfair terms and conditions such as hidden costs, break fees and penalties.

Online lenders that quote their loans on a cost per day repayment basis without disclosing the true total cost of the loan, and then hit defaulting borrowers with big penalties, would be wise to carefully review their loan agreements.

The new law will hopefully encourage big suppliers to be more thorough and proactive in identifying and correcting standard terms that could be regarded as unfair. In recent days both the Commonwealth Bank and Westpac have proactively announced refunds to customers due to internal errors the banks themselves have uncovered.

Proactively correcting terms that might be seen as unfair is a smarter long term option for a big supplier relative to an expensive and public court process culminating in an adverse finding.

What should you do?

From November 12, the courts are there to afford small business owners some protection if you believe a standard form contract you have signed contains terms and conditions that are unfair.

If you think the terms of a standard from contract might be unfair, talk to the other party. While the size imbalance might still exist, your rights are now more clearly spelled out.

Of course, prevention is always the best cure and small business owners should carefully review all terms of any contract they enter into. If you are not sure, it’s wise to seek advice from a trusted and expert advisor such as your accountant or lawyer. It might cost you in the short term but could save a lot of heartache in the longer term.

Two-edged sword

The law works both ways so if you use standard form contracts with SME customers it may be worth having a lawyer review your standard terms and conditions in order to satisfy yourself that none would be seen by a customer or court as being unfair.

Neil Slonim is the founder of theBankDoctor.org, a not-for-profit online source of free, independent banking advice for SMEs.