Legal Update – Unfair Contract Terms Regime Extended to Small Business Transactions

26 October 2016

From 12 November 2016, Federal laws which make so-called “unfair terms” in standard form consumer contracts legally unenforceable will be extended to apply to small businesses as well. Previously, these laws only applied to contracts where the product/service was purchased for personal, domestic or household use. With the extension of the laws imminent, time is of the essence for suppliers to small businesses to understand their impact and to take steps to ensure their contracts are in line with the new laws or revised in a way that assists their enforceability.

What is an “Unfair Term”?

Under the Federal laws, a contract term is “unfair” if:

(a)   it would cause a significant imbalance in the rights and obligations of the parties;

(b)   it is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and

(c)   it would cause detriment (financial or other) to a party if it was sought to be enforced.

In deciding whether a term is “unfair”, a Court will examine:

(a)   the contract as a whole (rather than cherry-picking clauses in isolation);

(b)  the bargaining powers of both parties (e.g. large corporations vs small businesses);

(c)   whether the term was made clear (e.g. whether the term is written in plain English,  whether it was hidden in the fine print etc).

As you might appreciate from the above, whether a term is “unfair” may not be obvious and requires a broad consideration of a range of factors specific to the contract and the circumstances of the parties involved. The legislation helpfully provides some examples of terms which may be considered “unfair”, depending on the circumstances. One such example is a term which allows a party to unilaterally vary/change the contract after it has been signed.

If the Court decides that a contract term is “unfair”,  it will be unenforceable and the party advantaged by the term will not be able to rely on it for the rights they thought they had.

“What is a “Small Business”?

Under the new laws, a “small business” is defined as one that employs less than 20 employees. However, importantly, the laws only apply to contracts for goods/services valued at less than $300,000 if the contract’s duration is less than 12 months, or less than $1 million if longer than 12 months.

What Should Businesses Do?

If you deal with businesses with less than 20 employees, we recommend that you review your standard form contracts to determine whether they contain terms which are likely to fall afoul of the new laws.

As mentioned above, if your standard form contracts “go too far” in the protections they seek, it may mean that certain rights contained within them are in fact legally unenforceable. But if those clauses are reviewed and revised now – providing a more appropriate balance of each party’s rights and obligations – this could enable your business to retain some or even most of the protection you originally had, rather than no protection at all.

We would be happy to assist you in reviewing your standard form contracts to minimise the risk of not being able to enforce your rights once the new laws commence for transactions involving small businesses.

Contact Partner: Michael Coe
Direct Telephone : 07 3210 5709
Mobile Telephone : 0408 983 876
michael.coe@kinneallymiley.com.au

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