Unfair Contract Terms in Small Business Contracts

From 12 November 2016, a new law will be in effect which will extend the unfair contract term protections to small business contracts.[1]

What contracts will be covered?

The new law will apply to a small business contracts entered into or renewed on or after 12 November 2016. This means that current contracts will still stand, but if the contract is varied or begins on or after 12 November 2016, the new law will apply to the varied contract terms.

The following contracts will be affected:

• where the contract is for the supply of goods or services or the sale of an interest in land;
• at least one party is a small business, being a business that employs less than 20 people (which includes part-time and casual employees employed on a regular and systematic basis); and
• the upfront price payable under the contract is no more than $300,000, or $1 million if the contract is for a term of more than 12 months.

What is a standard form contract?

A standard form contract is one that has been prepared by one party to the contract and 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. For example, the same Credit Application is normally given to each new customer by goods/services providers and the customer does not always have the opportunity to negotiate individual terms.

The factors relevant in determining whether a contract is a standard form include:

• the bargaining power of both parties to the transaction;
• whether the contract was prepared before any discussion relating to the transaction occurred between the parties;
• whether a party was required to accept the terms of the contract;
• whether a party was given an opportunity to negotiate the terms of the contract; and
• whether the terms of the contract take into account the specific characteristics of a party or the particular transaction.

What is an unfair contract term?

Under the Australian Consumer Law (“ACL”) [2], an unfair term is a term that:

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

In order for the term to be unfair, it must satisfy all three criteria. The court will look at the contract as a whole to determine whether the term is unfair.

The following are examples of unfair terms:

• enables one party (but not another) to avoid or limit their obligations under the contract;
• enables one party (but not another) to terminate the contract;
• penalises one party (but not another) for breaching or terminating the contract;
• enables one party (but not another) to vary the terms of the contract; or
• enables one party (but not another) to assign the contract without consent.

What are the consequences if a contract contains an unfair term?

If a party to the contract considers a term to the contract is unfair, they can apply to the Federal Court for a declaration that the term is unfair. If the term is considered unfair, then the unfair term will be void. This means the term will be unenforceable and treated as if it did not exist. The contract will only continue to bind the parties if it can operate without the unfair term.

What should you do now?

The law does not take effect until November 2016, so you have time to review your current contracts to determine whether they contain any unfair terms. It will be important to look at any indemnities, releases from liability and termination clauses in your contract.

JHK Legal has vast experience in drafting and reviewing contracts and is able to assist with ensuring your contract complies with these new laws.

For more information, please contact our office and speak with one of our lawyers.

Author: Cassandra Garton, Lawyer

Published: March 2016

[1] Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015.

[2] Schedule 2 of the Competition and Consumer Act 2010.