Unfair Contract Terms – advice for small businesses

Unfair Contract Terms – advice for small businesses

From 12 November 2016, small businesses will be protected from unfair contract terms in standard form contracts. While the protection of consumers from unfair contract terms is not a new concept, the extension of this protection to cover small businesses will have a significant impact on the way in which businesses contract with each other. Businesses should obtain specific legal advice and review their standard form contracts to ensure that they do not breach of the new law.

Who will be protected?

The new law protects small businesses entering into or renewing standard form contracts for the supply of goods or services where the upfront price payable under the contract is no more than $300,000 or $1 million if the contract is for more than 12 months (Threshold Amounts).

The upfront price payable is the total consideration payable under the contract which is disclosed at or before commencement but does not include any amounts that are contingent.

Some contracts are excluded from the unfair contract terms laws including shipping contracts, constitutions and insurance contracts.

What is a small business?

For the purpose of unfair contract terms under the Australian Consumer Law (ACL), a small business is one that employs less than 20 people including casuals employed on a regular and systematic basis. The number of employees will be determined by a simple head count.

A small business employs less than 20 people

(Note – small business is defined differently under the ACL compared to the Fair Work Act which defines a small business as having less than 15 employees).

What is an unfair contract term?

A term is considered unfair if:

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

Examples of unfair contract terms are provided in the ACL.

Terms that define the main subject matter of the contract, set the upfront price payable or are required by law are exempt from being declared unfair.

A court or tribunal will decide whether or not a term is unfair.  If a court or tribunal finds that a term is unfair, the term will be void.

What is a standard form contract?

There is no set definition for a standard form contract. However, under the ACL, where a party alleges a contract is a standard form contract, the presumption is that the contract is a standard form contract unless the other party can prove otherwise.

In making a determination as to whether or not a contract is a standard form contract, a court will consider the following:

  1. Does one part have all or most of the bargaining power?
  2. Was the contract prepared by one party before the transaction?
  3. Was one party required to either accept or reject the terms of the contract as presented (i.e. take it or leave it basis)?
  4. Was the other party given an opportunity to negotiate the terms of the contract?
  5. Is the contract tailored?
  6. Any other matters provided in the regulations that must be considered.

When will this protection apply? 

The new law will apply to standard form contracts entered into or renewed on or after 12 November 2016 provided that:

  1. The contract is for the supply of goods or services;
  2. One of the parties is a small business; and
  3. The upfront price payable under the contract is no more than the Threshold Amounts.

The new law will also apply to terms varied on or after 12 November 2016.

What should businesses do now?

Businesses should conduct a review of all of their standard form business contracts prior to 12 November 2016 to ensure that they are compliant.

Businesses should also consider creating separate contracts for small businesses.

Small businesses should ensure that they obtain legal advice prior to entering into or renewing contracts from 12 November 2016.

Need assistance?

Industry Legal Group can provide clients with information and advice on unfair contract terms. We can also assist with reviewing and amending standard form contracts so that they comply with the new law. Please contact Industry Legal Group on 1300 736 435 or info@industrylegalgroup.com.au if you have any question relating to this article or to discuss any legal issues that arise in your business.

This article is intended for information purposes only and should not be regarded as legal advice. Please contact Industry Legal Group for specific legal advice before taking any action.

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