By Max Petro Senior Associate Ash St.
Protection for small businesses from ‘unfair contract terms’ – Expiration of transitional compliance period.
- Certain ‘standard form contracts’ involving small businesses entered into after 12 November 2016 (or existing contracts which are amended or extended after this date) are now subject to the restrictions against ‘unfair contracts terms.’ Standard form contracts are those prepared by one party with the other having little or no ability to negotiate (i.e. offered on a ‘take it or leave it’ basis).
- Where a term is deemed to be ‘unfair,’ that term will be void and the parties will not be bound by it. Examples of unfair terms are those which give one party certain rights and not the other (such as being able to limit their liability, terminate the contract, or vary the terms of the contract).
- Small businesses, and parties who deal with small businesses, should review their standard form agreements to ensure compliance with the new legislation to avoid the risk of contractual obligations not being binding on the other.
In 2015 the Federal Government expanded the protections given to consumers against ‘unfair contract terms’ to provide such protections to small businesses. Following the introduction of the new rules, companies had a 12-month transitional period to review their existing agreements to ensure compliance with the legislation. This period ended on 12 November 2016 and the rules now apply to standard form contracts involving small business.
…this legislation will apply to 95% of small businesses in Australia.
Who is this relevant for?
The intention of this regime is to protect small businesses that enter into certain types of contracts. Small businesses, and the companies that deal with them, will be bound by the rules where their contracts meet the following conditions:
- the contract is for the supply of goods and or services (or the sale or grant of an interest in land);
- at least one of the parties is a small business (defined as one which employs less than 20 people, including casual employees);
- the upfront price payable does not exceed $300,000 (or $1 million if the contract term exceeds 12 months); and
- the contract is a ‘standard form contract’ (i.e. a contract which is prepared by one party with limited ability for the other to negotiate and amend the terms).
Whilst there are some exceptions (such as various types of insurance arrangements, and shipping contracts), it is estimated that this legislation will apply to 95% of small businesses in Australia.
What are the implications?
Contractual terms which are deemed to be ‘unfair’ will be voided, and the parties will not be bound by them. To the extent the rest of the contract can continue without the voided term the remainder of the contractual obligations will remain. Terms which meet the following criteria are likely to be considered ‘unfair:’
- those which cause a significant imbalance in the parties’ rights and negotiations;
- are not reasonably necessary to protect the interests of the party who benefits from the term, and
- cause financial or other detriment (such as a delay) to the small business if it was enforced.
What should I do?
If your business uses standard form contracts when dealing with small business customers, or if you are a small business subject to a standard form contract, it would be prudent to review these to ensure no terms could be considered unfair and therefore not enforceable.
If you’d like assistance, or have any questions, please contact firstname.lastname@example.org