New protections for small businesses against unfair contract terms

There's less than 260 days until the start of the new 'small business' unfair contract terms legislation (the Act). If you haven't already started reviewing your existing processes and contracts to ensure that they comply with the new legislation, then you're well advised to do so as soon as possible.
 

What's the latest?

On 2 February 2016, the Australian Securities and Investments Commission (ASIC) released Information Sheet 211 Unfair contract term protections for small businesses (Information Sheet 211).

Information Sheet 211 summarises the Act's protections for small businesses from unfair contract terms in standard form contracts. In it, ASIC urges businesses to use the transition period to review contracts for terms that would or may breach the new requirements. Information Sheet 211 was issued by ASIC as part of its supervisory role in connection with financial products and services.

Speaking on the release of Information Sheet 211, ASIC Commissioner Greg Tanzer said,

Small businesses, like consumers, have limited market power and a reduced ability to vary 'take it or leave it' standard form contracts. The consumer unfair contract term protections get positive outcomes for consumers and ASIC anticipates being able to do the same for small business, once the protections are extended to them.

Access ASIC's Information Sheet 211.

What's changing?

From 12 November 2016, the existing unfair contract term protections, as set out in the Australian Consumer Law 1 , will be extended from consumer contracts to cover standard form small business contracts where:

  • the contract 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. a business employing fewer than 20 people); and
  • the upfront price payable under the contract does not exceed $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 new 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.

How will small business contracts be affected?

A term of a small business contract will be void if it is unfair.

In the context of consumer contracts, the Federal Court has declared, by consent with the offending party, that clauses in the nature of the following were unfair:

  • enabling a business to unilaterally vary the price under an existing contract without providing the consumer with a right to terminate the contract;
  • requiring a consumer to provide an indemnify in any circumstance, even where the contract has not been breached and the liability, loss or damage may have been caused by the business's breach of the contract; and
  • enabling a business to unilaterally terminate a contract at any time with or without cause or reason.

The terms were considered unfair because they:

  • caused a significant imbalance in the parties' rights and obligations;
  • were not reasonably necessary to protect the legitimate interests of the advantaged party; and
  • if applied or relied upon, would cause detriment (financial or otherwise) to the other party.

Ultimately, only a court or tribunal (not the ACCC or ASIC) can decide that a term is unfair.

Terms most at risk?

The terms that are likely to come under the most scrutiny under the new legislation include terms that:

  • only permit one party to vary, renew or terminate the contract;
  • penalise only one party for a breach of the contract;
  • permit one party to unilaterally determine whether the contract has been breached or to interpret the meaning of the contract;
  • impose an evidential burden on the other party in proceedings or limit the other party's right to sue or adduce evidence; or
  • limit one party's right to sue the other party.

What if my contact term is unfair?

If a court or tribunal finds that a term is 'unfair', the term will be void and no longer binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

What should your business be doing?

Businesses have until 12 November 2016 to ensure they are compliant with the new unfair contract terms legislation. If you consider that these changes may apply to you, we recommend you:

  • review all of your agreements to ascertain which contracts and customers or suppliers are affected by the new legislation;
  • consider whether there is a need to amend any potentially unfair terms; and
  • review your standard terms and contracting procedures, in particular to ensure that you can identify if you deal with any 'small business'.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics.

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[1] Schedule 2 of the Competition and Consumer Act 2010 (Cth).