Introduction of unfair contract terms protection for small businesses

From November 2016 the unfair contracts protections currently available to consumers will be extended to small businesses.

The new laws recognise the fact that small businesses, like consumers, are vulnerable to the inclusion of unfair terms in standard form contracts as they can lack the time, resources and legal expertise to critically analyse contracts, and the bargaining power to negotiate with more powerful suppliers.

When introducing the legislation, the government highlighted that between 1 January 2011 and 31 December 2014 the Australian Competition and Consumer Commission received 1,375 small business complaints relating to unfair contract terms.

What contracts will be covered?

The protections will apply where at least one party is a small business (being a business which employs less than 20 people including casual employees employed on a regular and systemic basis) and the contract:

1. is a ‘standard form contract’;

2. is for the supply of goods or services or grant of an interest in land;

3. has an upfront price payable of no more than $300,000 or $1 million if the contract term is longer than 12 months; and

4. is entered into, renewed or varied after 12 November 2016.

What is a standard form contract?

A ‘standard form contract’ is a contract where one party has prepared the contract and the other party has little or no opportunity to negotiate the terms (a “take it or leave it” basis). In assessing whether a contract is a standard form contract considerations include:

• the bargaining power of the parties;
• whether the contract was prepared before the parties commenced discussions;
• the opportunity each party had to negotiate the terms; and
• whether the contract takes into account the specific characteristics of each party.

What types of terms could be considered unfair?

A term in a standard form contract is considered to be unfair if:

• it causes significant imbalance in the parties’ rights and obligations or it is not reasonably necessary to protect the interests of the party who it advantages; and
• it would cause detriment to a party if it were to be applied or relied on.

Examples include terms that:

• limit one party’s obligations or liabilities under the contract, but not the other;
• allow one party to vary the terms of the contract or terminate the contract, but not the other;
• penalise one party for breaching the contract but not the other;
• provide for automatic renewal and impose associated costs on one party; or
• impose pay-out requirements and obligations without reasonable grounds.

What happens if there is found to be an unfair term in a contract?

Where a standard form contract to which the new laws apply contains an unfair term a court or tribunal can determine the term void. This will mean the term is not binding on the parties, but the rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

Exclusions

There are some specific exclusions to the new laws, including shipping and insurance contracts, as well as some types of contract terms, including the amount of the upfront price payable or terms that define the main subject matter of the contract.

Kells can help!

If you currently use standard terms and conditions in your business then the new laws may apply to your contracting arrangements, with the risk being that if challenged, some of your important terms and conditions can be found to be unenforceable.

Now is a good time to have those terms and conditions reviewed with the operation of the new laws in mind. With 2 Law Society Accredited Specialists in Business Law leading the Kells Commercial Law team, we can assist with your review.

After 12 November 2016, if you think that a proposed contract term may attract the small business unfair terms protection, before signing, ask the other party to remove the term or amend it so that it is no longer unfair.

• For advice and assistance, call the Kells commercial team on 4221 9311.