Small business contracts: can you have too much security?

Corporate and Commercial

minutes reading time

DATE PUBLISHED: January 14, 2025

key takeaways

  • Suppliers may seek to obtain security from their customers over and above what is required to protect the supplier's legitimate interests.
  • It is a risk for the supplier of the goods and services if the supply arrangement is one to which the unfair contracts regime applies because suppliers may be at risk of financial penalties under the legislation for breaches of the unfair contracts regime.

Background

The changes to the Unfair Contracts Regime (UCR) which arrived in November 2023 provided heightened risks for small business contracts. This is due to the expansion of the definition of ‘small business contract’ in the Australian Consumer Law.

Terms and conditions of trade, supply agreements, hire agreements and contractor agreements will be small business contracts that are contracts for the supply of goods or services, where at least one party:

  • employs fewer than 100 full time equivalent employees; or
  • has an annual turnover of less than $10 million.

As most terms and conditions of trade, supply agreements, hire agreements and contractor agreements are often standard form contracts, the UCR risks are heightened, including putting the secured party at risk of having penalties enforced against them for contravening the UCR as well as the ASIC Act. This is in addition to having the contract declared void, among other things.

Security in small business contracts

Terms and conditions of trade, supply agreements, hire agreements and contractor agreements will generally include some type of security for payment of money or performance of an obligation.

Such security could be a:

  • retention of title clause or a charging of goods provided with the obligation to pay the purchase price for the goods;
  • general security interest in all present and after acquired personal property of the grantor;
  • security interest in all present and after acquired real property of the grantor; or
  • security interest in all present and after acquired personal and real property of the grantor.

It is common practice that such securities are included without consideration of what is reasonably necessary for the secured party to protect its legitimate business interests. That is, is what is being sought excessive in the circumstances?

If you are considering these matters while attempting to enforce the security and the grantor of the security interest is arguing that the contract is unfair, it is too late. You are on the back foot by having to prove that the security included in the contract is reasonable.

Not all security will be unreasonable, however, it is necessary to consider and keep supporting evidence of matters such as:

  • the opportunity afforded to the other party or parties to negotiate the contract;
  • any negotiations between the parties regarding the security to be provided under the contract;
  • reasons why any security arising by law (e.g. PMSIs for retention of title arrangements) would not be sufficient to protect you; and
  • reasons why you determined that the security taken is sufficient to provide the protection sought from the security.

conclusion

If you are reviewing your contracts for unfair contract terms, do consider the security position under the document and what is reasonably necessary to protect your position, for each contract with each customer or grantor.

If you have not yet recently reviewed your contracts, you should prioritise the review and understand whether you are in the scope of the UCR (noting that only one party to the contract needs to meet the requirements).

If you think you are not captured by the UCR, look closely at the current requirements for the UCR and your customers to determine whether your agreements fall into the scope of the UCR.

how can mcw help?

If you are a supplier, we can assist you with:

  • identifying if your contracting arrangements are subject to the UCR;
  • regulatory investigations and prosecutions, including those under the UCR;
  • defending claims from recipients of your goods and services against all forms of contract disputes (including under the UCR); and
  • drafting terms and conditions of trade, advising on security, and other aspects of your commercial arrangement.

If you are a recipient or customer, we can assist you with:

  • identifying if your contracting arrangements are subject to the UCR;
  • making contact or seeking assistance from regulatory bodies (including those under the Unfair Contracts Regime) against suppliers;
  • reviewing and negotiating arrangements before they are entered into; and
  • reviewing and negotiating arrangements after they are entered into to advise on the enforceability of any security (including under the UCR).

Contact Taryn Hartley and George Londy from our Corporate and Commercial Advisory team for more information.

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