Unfair terms in standard form small business contracts in the independent contracting sector – First questions.

With only eight weeks to go until the unfair terms in standard form small business contracts reforms take effect on 12 November 2016, and with the ACCC having indicated that the independent contracting sector is clearly in its sights[1], I am hoping that someone is looking at how this is going to play out for independent contractors and their principals in the recruitment, on-hire, and contracting industries. 

I might be about to ask more questions than I can answer; but let me ask them anyway and see if they bring a few issues into sharper focus.

The reforms are easy enough to follow in broad compass:

If, from 12 November 2016, you make or renew a standard form contract for the supply or acquisition of goods or services for an upfront price of not more than $300,000 (or $1 million if it is for more than 12 months) and it is with a small business, then any terms that meet the following three conditions may be declared unfair and therefore void (of no effect).

  1. the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract; AND
  2. the term is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; AND
  3. the term would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The new laws then give 14 examples of terms that might be declared void.

It’s not a matter of their being automatically void and of no effect (as some commentators seem to suggest[2]). You could not simply ignore them and assume that they are void. They are only void if a court declares them to be unfair once it is satisfied that the three conditions have been met.

And some terms are exempt – e.g. terms that define the main subject matter of the contract and terms that set the upfront price – but only to the extent to which that is all they do.[3]

Even allowing for some technicalities in drafting, sophistication in the approach that seems to be favoured by the Courts, and for some reversals of the onus of proof – all of that seems easy enough to comprehend in the case of a simple unilateral supply, where there is only one supplier and only one acquirer of services – the sort of case that is commonly encountered in the consumer field.

It becomes more complicated in cases, where there are bilateral or multilateral supplies and acquisitions, and where multiple parties are involved.

It is more complicated still, in multi-level procurement arrangements, where one party may be contracting on behalf of several other (non) parties, who are in a position to control the acquisition of services.

Take the common case of a contract entered into between an IT contracting or on-hire agency and an IT contractor. Let’s assume that the contractor is engaged under a genuine independent contracting arrangement – i.e. a contract for services. It is a type of arrangement that the ACCC has said it will be targeting.

Who acquires what from whom?

On the face of it, you might say that the Agency acquires services from the Contractor and agrees to pay a remuneration for the services that it acquires. But is that right in every situation? What are the services that the Agency really acquires from the Contractor; what services does the Contractor supply; and to whom are they supplied?

Those services might be:

  • the performance of the IT services, which the Agency supplies to its clients (a contracting/sub-contracting arrangement – where the Agency has the obligation to supply I.T. services to the client); or
  • the promise of the Contractor to perform services for the benefit of the Agency’s clients (an on-hire arrangement in which the Agency is not the supplier of IT services but of employment services or labour market intermediary services by which it acquires a promise of performance from contractors, whom it then presents to its Client to perform IT services under the supervision and direction of the Client). The IT services in this scenario are actually acquired by the Client under a non-contractual supply made by the Contractor.

Parties to these arrangements will need to be precise about what they are and they will have to make sure that their contracts are equally precise if they wish (or need) to take advantage of sections of the ACL that exempt the main subject matter of the contract and the upfront price from unfair terms scrutiny.

And that is not the end of it. What happens in the case of an incorporated contractor, where a small privately held company, which is controlled by the individual who provides the IT services, is interposed and the contract binds the Agency, the small company and the individual? Now who is supplying what to whom? Who is the small business? Who is the “Contractor”? What is the actual status of the additional party? What terms bind it? Are they subject to unfair terms scrutiny?

And that is still not the end of it. Under a typical agency engagement, an agency may undertake to supply some services to the Contractor. Let’s call them “agency representation services” for want of a better description. These are the things that the Agency does to assist the Contractor to obtain work and to get paid for it. They may even attract an “administration fee”. Do they form part of the “main subject matter of the contract”? Are they subject to unfair terms scrutiny? Are they a separate though interdependent contract? What is the upfront price for those services? What happens if a contact management company or payroll service is engaged to provide some of them?

Might the law of principal and agent (or that relating to contracts for the benefit of third parties) be invoked to cast a different complexion on these transactions – one that might facilitate the finding of contractual relationships between Client and Contractor, where previously these had been thought not to exist?

As I look in greater depth at more sophisticated labour market intermediary transactions (and they are by no means confined to the IT sector), I can see that there will be many situations that don’t sit comfortably with the consumer oriented approach of the ACL. Many more will be identified in the coming weeks and as arrangements in the independent contracting sector – especially within the employment services market – come into sharper focus.

With only eight weeks to go, I hope someone else is looking and I hope that you might join me in asking questions and maybe in providing some answers.


Andrew C. Wood

[1] Wood, A.C. (2016) “ACCC to focus on independent contracts at commencement of unfair terms of small business contracts reform starting 12 November”.  https://www.linkedin.com/pulse/accc-focus-independent-contracts-commencement-unfair-terms-wood?trk=hp-feed-article-title-publish

[2] See for example the Independent Contractors Australia’s explanation of the new laws at  http://www.independentcontractors.net.au/Current-Issues/fair-contracts/what-the-unfair-contract-laws-actually-do accessed 15/09/2016 at 1010 hrs.

[3] See the Australian Consumer Law sub-section 26(1)(a) and (b).

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