Litig8: The upcoming unfair contracts regime and its impact on small business contracts

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Each month as a part of Mills Oakley’s Litig8, we bring to you snapshots of eight key cases, legislative changes or other legal events. The summaries are not comprehensive and do not constitute legal advice. You should seek professional advice before taking any action based on the content of this article.

Part 6 of the March edition of Litig8

From 12 November 2016, amendments to the Competition and Consumer Act 2010 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth) will take effect which extend the consumer unfair contract term provisions. We provide a recap of those upcoming changes for you.

The purpose of the changes to the legislation is to extend the consumer unfair contract term provisions in the Competition and Consumer Act 2010 (Cth) (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to cover certain small business contracts.

A ‘standard form contract’ refers to a contract that has been prepared by one party is not subject to negotiation and  is offered on the ‘take it or leave it’ basis. Typically, these contracts are used for the supply of goods and services to consumers in many industries, including telecommunications, finance, domestic building, gyms, motor vehicles, travel and utilities

The law will apply to a ‘standard form contract’ that is entered into or renewed on or after 12 November 2016 (or if varied after that date, to those variations) which:

  • Is for the supply of goods or services or the sale or grant of an interest in land
  • Has one party that is a small business where the term ‘small business’ refers to a business that employs less than 20 people
  • The upfront price payable is no more than $300,000 or $1 million if the contract is for more than 12 months

A party must satisfy three tests in order for a term in a standard form contract to be deemed unfair. They are:

  • It would cause a significant imbalance in the parties’ rights and obligations under the contract
  • It is not reasonably necessary 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 to the contract if the term were applied or relied on.

If the Court deems that the terms are unfair, Courts will have the power to declare that a term of a standard form small business contract is void or if the contract cannot operate without the term, the entire contract can be declared void.

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