Play fair with small business.

10 November 2016 | Reading time: 2 minutes

12 November 2016 is d-day!

New unfair contract laws will commence in Australia extending the coverage of consumer protection to ‘standard form’ small business contracts. Business to business transactions will be significantly impacted as it is estimated up to 95% of contracts with small businesses will be covered by the new laws.

Under the new laws, unfair terms in ‘standard form’ small business contracts can be declared void by a court. This means that the unfair term will be unenforceable and will be removed from the contract. So don’t drop the ball – understand your obligations.

What is an unfair contract term?

An unfair term is one that:

  • causes a significant imbalance in the parties’ rights and obligations under the contract;
  • would cause detriment (financial or otherwise) to a party if it were to be relied on; and
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it.

Level playing field: examples of unfair contract terms.

Under the Australian Consumer Law [1], contract terms have been cited as unfair where they:

  • permit one party, but not another party, to terminate, vary or renew the contract;
  • permit one party to vary the price, without the right of the other party to terminate;
  • permit one party to unilaterally vary the goods or services to be supplied, or the interest in land to be sold or granted;
  • permit one party, but not another party, to assign the contract without that other party’s consent;
  • permit one party, but not another party, to avoid or limit performance of the contract, or limit liability;
  • permit one party to unilaterally determine if a breach has occurred or impose a penalty for a breach or termination; or
  • impose an evidential burden on the other party in proceedings or limit the other party’s right to sue or adduce evidence.

Good things come in small packages.

‘Small business contracts’ are contracts for the supply of goods or services, or the sale or grant of an interest in land, where:

  • at least one party to the contract employs fewer than 20 people; and
  • the upfront price payable under the contract is:
    – $300,000 or less; or
    – $1 million or less, in the case of contracts with a duration of more than 12 months.

Take it or leave it.

The Australian Consumer Law does not define a ‘standard form contract’. Generally, a ‘standard form contract’ is prepared:

  • by one party to the contract and is not subject to negotiation between the parties;
  • on a ‘take it or leave it’ basis with no effective opportunity to negotiate its terms.

Avoid an unfair playing ground.

Businesses should review their contracts with small businesses to assess the impact of the new laws. It is recommended businesses take the following steps to ensure compliance with the new laws:

  • review all existing contracts to determine whether they are likely to be standard form contracts. If unsure, consider how many people it employs.
  • determine whether to amend or delete any terms in existing standard form contracts at risk of being void; and
  • consider creating a separate set of contracts for big businesses and small businesses.

You should seek advice from one of Bespoke’s commercial lawyers to mitigate the risk that your contract terms with small businesses are declared unfair and therefore void.

[1] Section 25 of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)).