Unfair Contract Terms Extended to Small Business

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By Tim Cox, Partner

Overview

The Australian Consumer Law already provides that an unfair contract term in a standard form consumer contract is void.  In October 2015, legislation was passed which extends unfair contract term protections to businesses with less than 20 employees, who agree to standard form contracts valued at less than $1 million if the contract is longer than 1 year.

Implications for you 

There is a 12 month transition period before the new law takes effect in October 2016. During this period, you should:

  • identify your standard form B2B contracts (eg: services agreements, supply agreements, franchise agreements);
  • determine whether these may be entered into with small businesses;
  • determine (if possible) whether the upfront price payable will exceed either $300,000 or $1 million if its duration is more than 12 months; and
  • identify and review any unfair terms.

What is a standard form contract?

Contracts like software end user licence agreements, retail leases, waste management agreements and franchise agreements are likely to be caught, but other contracts may also fall under the new law if:

  • one party has all or most of the bargaining power relating to the transaction;
  • the contract was prepared by one party before any discussion about the transaction;
  • the other party was effectively required to either accept or reject the terms of the contract in the form they were presented; and
  • the other party was not given an effective opportunity to negotiate the terms of the contract.

If the customer is able to freely negotiate and amend the contract, it may not be caught by the new law, but merely negotiating price or the goods/services being supplied probably won’t be enough.

What is a small business contract?

A contract is a small business contract if at the time it was entered into:

  • the contract was for the supply of goods or services, or a sale or grant of an interest in land,1 or the supply of financial products or services;2
  • at least one party was a small business that employs less than 20 people (excluding casual employees); and
  • either:
    1. the upfront price payable is under $300,000, if the contract period is less than 1 year; or
    2. if the contract is longer than 1 year, the upfront price is under $1 million.

What is an unfair term? 

A term is unfair if:

  • 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 if it were to be applied or relied on.

Terms that are unfair can be declared void, although the contract will continue to bind the parties to the extent that it is capable of operating without the unfair term.

Examples 

The following terms may be deemed unfair:

  • a term that permits a supplier to:
    1. change prices without the customer’s right to terminate the contract (lock in terms);
    2. unilaterally determine when the contract has been breached;
    3. unilaterally vary the characteristics of the goods or services to be supplied; and
    4. assign the contract to the customer’s detriment without the customer’s consent.
  • a term that penalises the customer but not the supplier, for breach or termination of contract;
  • a term that limits the customer’s right to sue the supplier; and
  • a term that limits the supplier’s liability for its agents.

Exclusions 

A small business contract will not be covered by the new law if it is already subject to industry-specific laws that have been deemed enforceable and equivalent.

Company constitutions and contracts for management investment schemes are exempt.

The new law won’t apply to terms that:

  • define the main subject matter of the contract;
  • set the upfront price; or
  • are required or permitted by law.

Terms may not be unfair if they are clearly drawn to the other party’s attention prior to the agreement.

Mills Oakley can assist 

The changes will apply to small business standard contracts entered into after the 12 month transition period has ended in October 2016, or contracts renewed or terms varied after that date.

We strongly recommend that you start your review as early as possible to allow sufficient time for your standard form contracts to be updated, printed and fully understood by contract managers.

Mills Oakley can assist with your review.

Mills Oakley Lawyers is a leading Australian law firm. Our Corporate Advisory group can assist with reviewing contracts for companies that may be affected by the new unfair contract terms.

 

1 Competition and Consumer Act 2010 – Australian Consumer Law

2 Australian Securities and Investments Commission Act 2001 

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

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