As you may have heard there is a new law coming into effect from the 12th November 2016 which will protect small businesses from unfair terms in standard form contracts.
The Australian Consumer Law, introduced under schedule 2 of the Competition and Consumer Act 2010 (Cth) has implemented an “unfair contract terms” regime. The provisions applied to consumer contracts, which sought to void terms used in standard form contracts that were deemed “unfair” has now been extended to cover “small business contracts”.
This means that if you are a business that offers standard form contracts to other businesses or, possibly another business has offered you a standard form contract, then you need to be aware of how the new law affects you.
Furthermore, if you are a business using standard form contracts then it is important that you be proactive in ensuring that your contracts will comply with the new legislation when it comes into effect. This may involve making changes to your standard form contracts as soon as possible but before 12 November 2016.
What is a standard form contract?
Firstly a standard form contract is an agreement where:
• The terms and conditions are set by one business, and
• There is little or no opportunity to negotiate the terms of the contract.
This may be better understood as a pre-prepared contract (where the terms in the contract are pre-determined and generally not negotiable) which is offered by one party to the contract, to the other party on a ‘take it or leave it’ basis.
What is an Unfair Term?
A term may be seen as unfair if it:
• Creates more favourable rights for one party to the contract,
• Prescribes greater obligations or harsher remedies against one party to the contract for an event that either party could trigger,
• Is not necessary to the protection of the interests of either business, and
• Would cause harm to a small business if it was kept in the contract.
In order for the term to be unfair, it must satisfy all of these criteria.
The Act provides a number of useful examples of unfair terms, including (but not limited to):
• A term that enables one party, but not the other, to terminate the contract;
• A term enabling one party, but not the other, to avoid or limit performance of the contract;
• A term permitting one party, but not the other, to vary the contract terms; and
• A term penalising one party, but not the other, for breaching or terminating the contract.
If you require more information on determining whether a term is unfair, then please follow the link here for a more exhaustive guide from the ACCC.
The ACCC has also stated that ultimately only a court or tribunal can decide that a term is unfair. If a court or tribunal finds that a term is ‘unfair’, the term will be void – which means it is not binding on either of the parties.
What is a small business and when are they protected?
The new law protects small businesses with fewer than 20 employees that enter into or renew a standard form contract:
• On or after the 12th November 2016,
• For the supply of goods or services or the sale or grant of an interest in land,
• And if the upfront price payable under the contract is valued up to $300,000 or, $1 million if the contract is for more than 12 months.
What should you do?
Businesses that intend to enter into contracts with small businesses, or intend to vary existing contracts with small businesses, now have until 12 November 2016 to review and amend standard form contracts in order to comply with the legislation. It is also important to note that this law will also apply to an existing contract if it is renewed after the effective date.
Prudent business owners and managers will start a review of all their standard contracts now and take the necessary steps to remove any terms which could be characterised as “unfair” under the new legislation.
If you require assistance with the review process or the drafting of fairer terms please call us, we can help.
For further information, please contact the author.
This article is posted in Adelaide, South Australia by Tri-meridian Corporate & Commercial Law and is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. We do not accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your professional adviser.