Be prepared for small business unfair contract laws

Further to our blogs of July 2015 http://nfcommerciallawyers.blogspot.com/2015/07/proposed-protection-to-small-businesses.html and April 2016 http://nfcommerciallawyers.blogspot.com/2016/04/protection-to-small-businesses-from.html, from 12 November 2016 amendments to the Australian Consumer Law will come into operation which are aimed to protect small businesses from unfair terms in standard form contracts.

Standard form contracts are contracts where the terms and conditions are set by one party and the counter-party has little or no opportunity to negotiate those terms. For the purposes of the new law, they include contracts:

• for the supply of goods or services or the sale or grant of an interest in land;
• where at least one of the parties is a “small business”, being a business employing less than 20 people;
• where the upfront price payable under the contract is no more than $300,000 or $1,000,000 if the term of the contract is greater than twelve months;
• entered into on or after 12 November 2016 and variation to existing contracts occurring after that date.

Examples of unfair terms include:

• terms which enable a party (but not the other party) to avoid or limit their obligations;
• terms which enable a party (but not the other party) to terminate the contract;
• terms that penalise a party (but not the other party) for breaching the contract; and
• terms that enable a party (but not the other party) to unilaterally vary the terms of the contract.

Unfortunately, only a court or tribunal will be able to to determine whether a term of a contract is in fact unfair. That is, it is not the role of the Australian Competition and Consumer Commission to make a determination on whether a clause in a contract is fair or unfair.

The effect of a term being determined unfair will render that term void. However, the balance of the contract should continue to bind the parties to the extent that the contract is capable of operating without the unfair term.

Certain contracts are excluded from the operation of the law which include contracts entered into before 12 November 2016 (unless renewed on or after that date), shipping contracts, constitutions of companies, managed investment schemes, certain insurance contracts and contracts in sectors exempted by the Minister.

If you think that a term in a standard form contract is unfair, the ACCC recommends you request the other party to remove the term or amend it so that it is no longer unfair. The ACCC further recommends that in the absence of a satisfactory outcome, that the aggrieved party seek a declaration from a court that the relevant term is unfair. Accordingly, it is not possible for a party to a standard form contract to unilaterally declare that a term in a contract is unfair and claim it has no impact on that party.

It is recommended that parties who impose standard form contracts on small businesses structure a compliance program aimed at identifying potential unfair terms in their precedent documents and take steps to amend those terms ahead of 12 November 2016.  A compliance program would entail:  

1. a review of existing contractual arrangements to identify counter-parties who qualify as small businesses;
2. identifying which of those contracts with small businesses are in fact standard form contracts;
3. identifying potentially unfair terms within contracts with those small businesses;
4. determining how to deal with those unfair terms; and
5. amending precedent documents to ensure all standard form contracts entered into with small businesses on and after 12 November 2016 comply with the new laws.

If you require assistance with reviewing your standard form contracts please contact Andrew Bini.

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Proposed Protection to “Small Businesses” from Unfair Contract Terms

The Federal Government’s Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 was tabled in Parliament in 24 June 2015.  If passed in its current form the Bill will afford “small businesses” protection against unfair contract terms in “small business contracts” in a manner similar to the protections consumers currently have against unfair contract terms in consumer contracts under the Australian Consumer Law (see clause 23 of schedule 2 of the Competition and Consumer Act 2010 (Cth)).  Amongst other things, the Bill proposes to amend the ACL to extend the prohibition on unfair contract terms (which currently only apply in relation to consumer contracts) to small business contracts.

 

Small businesses are defined in the Bill as businesses with less than 20 employees. Small business contracts are defined in the Bill as contracts for the supply of goods or services or the sale or grant of an interest in land, where one party is a small business and the upfront price payable under the contract does not exceed $100,000.00 or the contract has a duration of more than 12 months and the upfront price does not exceed $250,000.00.

 

The Bill effectively provides that a term of a small business contract will be void if the term is “unfair” and the contract is a “standard form contract”.

 

Section 24 of the ACL defines unfair terms as those that would cause a significant imbalance in the parties’ rights and obligations arising under the contract, those which are not necessary to protect the interest of the party who would be advantaged by the term and those terms which would cause detriment to the other party if they were relied on.

 

Section 27 of the ACL provides some guidance for determining whether a contract is a standard form contract.  These include contracts where one of the parties has most of the bargaining power and where a party is required to either accept or reject the terms of the contract without an effective opportunity to negotiate the terms of the contract.

 

The Federal Minister for Small Business the Hon Bruce Billson MP in March this year noted on his web page that the Australian Small Business Commissioner had observed instances of unfair contract terms in telephone and internet contracts, office equipment leasing contracts and retail premises leases.

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