From 12 November 2016, a new law will protect small businesses from unfair terms in standard form contracts. Essentially the new law amends the Competition and Consumer Act 2010, and it is important for businesses to understand how it will impact the way in which they enter into contracts.
What type of contracts are affected?
The law will apply to a standard form contract entered into or renewed on or after 12 November 2016, where:
- it is for the supply of goods or services or the sale or grant of an interest in land;
- at least one of the parties is a small business (i.e. it employs less than 20 people, including casual employees employed on a regular basis); and
- either 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.
If a contract is varied on or after 12 November 2016, the law 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. The law will apply even where both parties to a contract are small businesses.
The law is likely to affect a range of contracts, including:
- contracts for supply of services including IT services, advertising services and banking services;
- purchase of motor vehicles;
- equipment finance;
- loans to small businesses;
- technology licences;
- contracts between retailers and suppliers;
- contracts for the transport of goods by land;
- storage of goods;
- building contracts; and
- contracts for online purchases.
What types of terms may be unfair?
The law sets out examples of terms that may be unfair, including terms that:
- enable one party (but not another) to avoid or limit its obligations under the contract;
- enable one party (but not another) to terminate the contract;
- penalise one party (but not another) for breaching or terminating the contract; and
- enable one party (but not another) to vary the terms of the contract.
Ultimately, only a court has the discretion to decide that a term is unfair.
To be ‘unfair’, a term must:
- cause a significant imbalance in the parties’ rights and obligations;
- not be reasonably necessary to protect the legitimate interests of the party advantaged by the term; and cause financial or
- cause financial or other detriment (such as delay) to a small business if it was relied on.
Effect of having an unfair contract term
If a court finds that a term is ‘unfair’, the term will be void – this means it is not binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of implementation without the unfair term.
The court has the absolute discretion to determine whether or not a contract is a standard form contract. However, in making such a decision the court must consider:
- the relative bargaining power of the parties;
- whether or not the contract was prepared by one party prior to any discussion concerning the transaction between the parties;
- whether one party was, practically, required to either accept or reject the contract in its present state (was it a “take it or leave it” situation); and
- whether the customer was given an effective opportunity to negotiate the terms of the contract (with the exception of terms relating to price).
It is not an offence to include an unfair term in a small business contract and there are no penalties for doing so. However, if a person makes an attempt to enforce a provision of a contract that is declared unfair then remedies may apply, including compensation to the other party.
A small business, the Australian Competition and Consumer Commission (ACCC), a state or territory regulator or the Australian Securities and Investment Commission (ASIC) may apply to the court to declare that a term of a standard form small business contract is unfair.
What should businesses be doing?
All businesses (including small businesses and not-for-profit businesses) should consider reviewing their standard form contracts (whether these are contracts with suppliers, customers or independent contractors) to determine the circumstances in which they may be used and whether they will be impacted by the amendments to Australian Consumer Law. If they are so impacted, they may need to be amended. Small businesses should also consider their approach to negotiating standard form contracts offered by other parties in the course of business.
(Disclaimer: The material in this article is of a general nature and intended for information only. It is not intended to be comprehensive and does not constitute legal advice. Any person with a specific legal issue should consult a lawyer.)