Is Your Standard Form Business to Business Contract Enforceable?

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By Tim Cox, Partner

The unfair contract terms regime could render terms in your standard form business to business contracts void and unenforceable.  Small businesses can challenge standard form contract terms as “unfair” after the Australian Consumer Law (ACL) unfair contract terms regime extended to small business contracts last year.  Checking compliance with the regime is prudent particularly with the Australian Competition and Consumer Commission (ACCC) prioritising the protection of small businesses under the regime.

Which contracts are captured?

A “small business contract” is subject to the unfair contract terms regime when:

  • there supply of goods or services, or a sale or grant of interest in land;
  • it is between businesses where at least one business employs less than 20 people at the time that the contract was entered into; and
  • the upfront price payable does not exceed:
    • $300,000; or
    • $1 million for contracts with a duration of more than 12 months.

Contracts that are entered into, renewed or terms that are varied on and from 12 November 2016 are captured by the regime.

What is an “unfair” contract term?

A contract term is “unfair” if:

  • a significant imbalance is caused in the parties’ rights and obligations;
  • it is not reasonably necessary to protect the legitimate interests of the party gaining the advantage; and
  • the term would cause detriment (financial or otherwise) to a party if relied on.

When determining if a contract term is “unfair” a court will also consider whether the term is available to both parties, is clear and understandable, and the contract as a whole.

Implications for business standard form contracts

If a contract term is found to be “unfair” by a court it will be void and no longer bind the parties, however, the remaining contract can continue to bind the parties.    Unenforceable terms could leave a business exposed, for example, if an indemnity or limitation of liability clause is void for being “unfair”, the contract may continue without it.

Contract Audit

With the ACCC focusing on protecting small business under unfair contract law this year, and already conducting unfair contract law investigations, it is wise to check standard form business to business contracts for compliance.  When was the last time you checked your standard form contracts?

We are offering a service to our clients to audit their simple standard form contracts to check if this regime applies for a fixed fee of $500 per contract.

For further information, please do not hesitate to contact us.

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