Expansion of unfair term protections to small business commencing 12 November 2016

by Jessica Carroll, Lawyer

If you trade with small businesses and use standard form contracts, it’s important to be aware of upcoming changes to unfair contract protections in the Australian Consumer Law. Businesses should ensure they review their standard form contracts for ‘unfair terms’ to ensure they do not fall foul of the new laws.

From 12 November 2016, the national unfair term protections for consumers in the Australian Consumer Law will extend to protect small businesses from unfair terms in standard form contracts.

Around four in five small business contracts are expected to be covered by the new protections, which will not only apply to new contracts but any renewals or variations to existing contracts that occur after 12 November.

The effect of the new protections is that the courts will be empowered to declare void those terms in standard form small business contracts that are considered ‘unfair’. This means the term/s will be unenforceable.

While no fines or penalties can be imposed on a contravening party, remedies such as injunctions, compensation orders, and damages will be available. There is also the risk of adverse costs orders should the matter make its way into the court system, reputational damage and associated loss/inconvenience to your business as a result of contractual term/s becoming unenforceable.

If not done already, all businesses should review the terms of their standard form ‘take it or leave it’ contracts to reduce the risk of uncertainty of terms that may be considered unfair and potential for dispute when the new protections come into force next month.

If you need any assistance with reviewing your standard form contracts or would like further advice on whether a particular contract will come within the ambit of the new legislation, please contact Thynne + Macartney’s Commercial team.

What contracts are covered?

The new protections will apply to small business contracts entered into or renewed after 12 November 2016, where:

  • the contract is a standard form contract;
  • it is for the supply of goods or services or the sale of a grant of an interest in land (including sale or leasing of land);
  • at least one party to the contract is a business that employs fewer than 20 persons – a small business; and
  • either of the following applies:
      1. the upfront price payable under the contract does not exceed $300,000; or
      2. the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

If a contract is varied on or after 12 November 2016, the protections will apply to the varied terms.

A standard form contract is one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms – that is, it is offered on a ‘take it or leave it’ basis.

For the purpose of the new protections, a contract that is alleged to be a standard form contract is presumed to be so unless proven otherwise. In other words, the onus will be on the contravening party to prove that the contract is not a standard form contract and therefore not covered by the new protections.

What contracts are not covered?

Whilst most standard form contracts will be covered by the new protections, there are some exceptions:

  • contracts entered into before 12 November 2016 (unless renewed on or after this date);
  • shipping contracts;
  • constitution of a company, managed investment scheme or other kind of body;
  • contracts subject to a prescribed industry-specific law.  For example, certain insurance contracts.

When is a term “unfair”?

A term may be considered “unfair” if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • it is not reasonably necessary in order to protect the legislation 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.

In deciding whether a term is unfair, the courts will consider the extent to which the term is transparent, as well as the contract as a whole.

Examples of terms that may be considered unfair include:

  • a term that enables one party (but not another) to avoid or limit their obligations under the contract;
  • a term that enables one party (but not another) to terminate the contract;
  • a term that penalises one party (but not another) for breaching or terminating the contract;
  • a term that enables one party (but not another) to vary the terms of the contract.

Who can apply for a declaration?

If a contract is a standard form small business contract, either party to that contract, ASIC, ACCC or a State or Territory regulator can apply to a court for a declaration that a term in the contract is an unfair term.

For more information contact:

Jessica Carroll, Lawyer

E: jcarroll@thymac.com.au

P: +617 3231 8864

This information is intended to provide a general summary only and should not be relied on as a substitute for legal advice.

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