How could unfair contract terms affect your business and your reputation?

The legislation relating to standard form contracts with small businesses is changing from November 12th and businesses need to understand what this really means for them.

In this short video, Corrs Partners Andrew McCormack and Joseph Barbaro take a closer look at the changes and the impact these will have on your organisation. Our experts consider:

  • The consequences of void terms in standard form contracts

  • The reputational aspects at stake for your organisation

  • The measures you need to take to safeguard your contracts

With the changes fast approaching, you should consider what this means for your business and develop mitigation strategies for your standard form contracts.

TRANSCRIPT

The extension of unfair contract terms to small businesses is all driven by the view that there’s an unfair bargaining position in the market and that small businesses are at the receiving end of a bad deal.

New legislation is going to be introduced that makes terms which are unfair in a small business contract unenforceable and this will have serious implications for construction companies and large companies who deal with major procurements. The unfair contract terms legislation which currently applies to financial services and to consumer contracts is being extended to apply to small business contracts. This legislation is designed to protect consumers from unfair terms in circumstances where they have little or no ability to negotiate the terms of the contract. 

If you are dealing with a business that the legislation deems to be a small business and that is 20 people or less then the legislation kicks in and it will void provisions that are deemed unfair.

And potentially if those terms go to the heart of the contract the whole contract itself might be unenforceable. 

This regime is going to apply where a small business has a contract with an upfront price of less than $300,000 or if it is a longer term contract, more than one year if the upfront price is $1 million or less. 

Under the new legislation a contract will be presumed to be a standard form contract unless and until the more powerful party can show that it is not. 

For the legislation to apply it has to be a contract for the supply of goods and services or for the grant or sale of an interest in land.

The legislation doesn’t actually prescribe what will be un unfair term but it does layout three guidelines to help you decide whether something is unfair or not.  First does the term create a significant imbalance between the parties’ positions? Second, does it cause financial detriment to the party effected by the term, is it reasonably necessary to have the term in the contract to protect the legitimate interests of the more powerful part who has drafted the contract.

In a typical construction contract there are a number of areas where you might find that your provisions are void for being unfair. The types of things could be time bars, provisions, provisions related to directions by a principal, termination for convenience clauses and even mandatory novation provisions.

If a small business thinks that a term is unfair it can make a complaint to ASIC. ASIC can then make an application to the Court for an order that the term is in fact unfair. A small business can also make a direct application to the Court although this would probably be less likely. If the Court determines that the term is unfair it will be void and unenforceable. 

It doesn’t mean that your contract falls away, the provision itself will be deemed void and the contract will continue to operate as if you didn’t have that term in it.  However if the term goes to the heart of the contract you risk the whole contract being voided.

If you regularly contract with small businesses and you use your standard terms to do so it would be advisable to review those standard terms and consider whether any of them might against these guidelines and this new legislation be considered unfair.

If I was contracting with small businesses what I would be doing is looking at my standard form contracts. The implications of this legislation can be quite significant both from a commercial point of view and a reputational point of view.

It would be worth considering whether to develop a separate suite of precedent documents purely for contracts with small businesses. These could be based on your usual standard terms and conditions but with some of the terms that one might consider could be challenged as unfair, tailored or removed so that the contracts are suitable for use with small businesses. If a contract term is successfully challenged as being unfair it can have quite significant implications. That term will be void not only in that contract but in other contracts with other small businesses. It also, if this happens, can create a reputational issue for the business as being seen to treat small businesses unfairly or in an inappropriate way. 

The extension of the legislation to cover small business will have wide ranging ramifications for those operating in the construction industry and all the way through to supply and procurement change. If you are doing business with small business then you are exposed if you are using unfair terms.