Things are looking up for the engine room of Australia’s economy – with changes set to allow small and medium sized businesses to grow and flourish. Hot on the tail of the Payment Times Reporting Bill 2020 (that strives to force down invoice payment times to 30 days), the Unfair Contracts legislation is now getting some serious teeth. This will mean bringing in fairness into contractual arrangements across all businesses. Why is this important to your business, and what are the changes?
Back in 2016 & 2017, I wrote a couple of articles explaining the Unfair Contracts legislation January 2016 and November 2017 . The easiest way to think of this is “Do unto others as you would have them do to you” – if your contract doesn’t meet this requirement, it will be illegal. Basically, the contracts are null and void (in part or in full) if they give one party (but not the other) the ability to do things. Examples include changing price without giving the other party a right to cancel the contract. Whilst there were some prosecutions in this area and some improvements (automatic roll-over contracts for instance seem to have disappeared), lawyers soon realised that it was often uneconomical for the small party to take legal action to rectify the unfair contract, and therefore advised the big businesses to ignore the legislation.
As a result of this, Federal Assistant Treasurer Michael Sukkar has managed to get Federal and State Governments to agree to:
- make unfair terms unlawful (not simply void), and giving the courts the power to impose a civil penalty
- Expanding the definition of a small business to under $10 million turnover or up to 100 employees and removing the requirement for a contract to be below a certain threshold.
An ACCC survey a few years ago identified around 2 million businesses in Australia have an average of 8 standard form “unfair” contracts each. The number has fallen a bit since then, but no follow up survey has been conducted. A “standard form contract” is a contract that has been prepared by one party to the contract without negotiation between the parties. Typical examples include a telecommunications or utilities/waste contracts, as well as standard “take it or leave it” supplier/purchase contracts from large providers or purchasers.
So, whoopee do? The legislation now being drafted also imposes fines. It might seem like a small change, but the “unlawful” definition can make directors personally liable for the fines if the boards running these companies continue to deliberately break the law. It would likely only take one or two successful prosecutions for other company directors to get the message and remove unfair clauses and conditions. The hole in the legislation is that as is becoming increasingly common, Government is excluding their own contracts.
All remaining Standard Form contracts will now need to be re-written. This should mean that a company can’t for instance dictate that they pay all suppliers End Of Month 60 days (without negotiating on another term such as the price), or that your energy provider increases their charges within the contract term without giving you the option to drop out.
Other examples applicable to our industry includes that it also removes the ability for one party to unilaterally determine whether the contract has been breached (for example, they can’t wait until payment is due then say we aren’t paying your invoice unless you prove the work is completed – they have an equal obligation to prove to the supplier that the work wasn’t completed).
It also includes that a party can’t limit the performance of the contract nor unilaterally vary the characteristics of the goods or services supplied. This could have a big impact on for instance projects in that the head contractor can’t tell the subcontractors that they have to do the job a particular way or use set processes/procedures, so long as the result is as agreed. It also seems to mean suppliers can’t be forced into accepting EBA’s when supplying another company. The subcontractor could insist on using their own methodologies. That’s not necessarily a bad thing for the head contractor in that it could remove some of the risks they take on by directing the work (and paperwork) be done to their dictated system, instead allowing the subcontractor to use their own systems.
Other contractual aspects that are likely to be impacted include stipulating unlimited indemnity; giving a company exclusive rights to provide a good or service; and controlling cancellation conditions such as notice periods or putting in penalties if customers cancel contracts.
How this will play out in practice is difficult to say. How many small suppliers/customers are actually going to have success re-negotiating these contracts, especially if “the industry standard” for instance is applied by all participants? And it still relies on a company taking its customer/supplier to court to get a determination. However, if all businesses approach these changes maturely, it unearths great potential to improve productivity and efficiency (and thereby everyone’s profitability) by utilising the full strengths of the respective parties in the supply chain.
Merry Christmas and Thank you!
2020 has not been without its challenges, and let’s just say it’s been an interesting year. Great to see so many of our customers continue to do well, and we sincerely appreciate your support in what for our industry has turned out to be a much better year than any of us would have predicted even 6-9 months ago. On behalf of all of your friends at RD Williams, we hope you can have a good break and recharge to give it all another shot next year. Merry Christmas and Happy New Year to you and your family!
As always, onwards and upwards!