Protecting the little guy: unfair contract terms to apply to small businesses

In April 2015, the Federal Government released draft legislation titled the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Bill), which if enacted, will extend the consumer unfair standard contract term protections to small businesses. 

The legislation proposes to amend the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act), and the Competition and Consumer Act 2010 (Cth) (CCA) and is anticipated to commence in early 2016. 

The current laws under the ASIC Act and CCA only apply to protect consumers (usually individuals) from unfair contract terms, and are said to fail to address the vulnerability of small businesses engaging in commercial transactions.  The Explanatory Material to the Bill states that small businesses are not entering into contracts due to a lack of confidence in understanding and negotiating contract terms and the costs of obtaining legal advice, often resulting in the businesses missing out on opportunities.

Heads of Agreement – when are they binding?

A recent judgment in New South Wales has clarified that a Heads of Agreement is generally considered binding if, at the time of entering into the agreement, the parties intended to be immediately bound by it.  This holds true even if the parties intended, and the Heads of Agreement between the parties records, that additional matters are to be agreed and a formal contract executed at a later time.  Further, any dispute about the subject matter of a Heads of Agreement will not affect the binding nature of that agreement.

The case highlights that parties contracting on a preliminary basis should take great care when considering the use of a Heads of Agreement.