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Labor to make unfair SME contracts illegal

Adam Zuchetti
Adam Zuchetti
25 January 2019 2 minute readShare
Chris Bowen, shadow Minister for Small Business

The federal opposition has pledged to make unfair terms within standard form contracts issued to SMEs illegal if it wins power, ramping up the existing law by imposing fines of up to $10 million on corporate Australia.

Labor issued a statement announcing that, if it wins this year’s election, it will act on recommendations from the ACCC and make unfair terms illegal and impose the hefty penalties for larger businesses incorporating them into contracts with SME suppliers.

The statement was jointly issued by Shadow Minister for Small Business Chris Bowen (pictured), Shadow Assistant Minister for Small Business Madeleine King, and Shadow Minister for Competition and Productivity Andrew Leigh.

“Australia’s current laws aren’t tough enough. While contract terms that unfairly exploit a power imbalance between the two parties can be voided by a court, there’s no punishment for the entity exploiting its market power,” the statement said.

“This means there’s nothing discouraging the big end of town from pushing smaller dependent firms to sign onto unfair arrangements.

“The Australian Competition and Consumer Commission has previously stated that making unfair contract terms illegal ‘would act as a better deterrent. In the ACCC’s view, currently there is minimal incentive for businesses to comply with [unfair contract term] laws’.”

Under the plan, unfair terms and unfair contracts would be illegal to issue or enforce, the definition of small business would be expanded to cover more SMEs, and companies found to have breached the law would face hefty financial penalties.

The exact “extended” definition of small business was not disclosed.

“Australia’s small businesses need smart reforms to ensure that they aren’t pushed around by the big guys,” the statement said.

The ACCC has long criticised the current laws as being ineffective, given that contract terms can only be deemed unfair by a court and, even when proven, simply strike down the terms rather than attract penalties.

In October, the federal government announced that it would give the ACCC and ASIC greater powers to investigate the fairness of standard form contracts, largely aimed at consumer protections, but stopped short of criminalising unfair contracts or introducing penalties.

Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), said that such a move would be “a major improvement in protecting small businesses”.

“By making unfair contract terms illegal, the Australian Competition and Consumer Commission (ACCC) would be able to penalise big businesses up to $10 million and issue infringement notices,” Ms Carnell said.

“We agree the contract size threshold should be increased to $1 million for contacts up to 12 months and $5 million for contacts greater than 12 months.”

According to Ms Carnell, small businesses enter into an estimated eight standard contracts each per year, as estimated by the ACCC, and the expense of testing their fairness in court is out of reach for many, making the rules around unfair contract terms a major issue.

“Phase I of our Access to Justice Inquiry found small businesses are unlikely to take action when faced with an unfair contract term in their standard form contract,” she said.

“They are reluctant to damage commercial relationships, and lack the resources and time to pursue litigation.

“Any change to legislation or regulation that levels the playing field between small business, the engine room of our economy, and the larger players is worth pursuing.”

Labor to make unfair SME contracts illegal
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Adam Zuchetti
Adam Zuchetti

Adam Zuchetti is the former editor of MyBusiness and a senior freelance media professional, specialising in the fields of business, personal finance and property. In 2020, he also embarked on his own business journey – inspired in part by the entrepreneurs and founders he had met through his journalistic work – with the launch of customised pet gifting and subscription service Paws N’ All.

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