Changes have recently been made which will extend rules on unfair contract terms, previously applied only to day-to-day consumers, to small business contracts – which may include contracts you sign!

These changes are in place now, but businesses have been given a grace period to November, 2016 to become compliant.

There are no changes to the current regime, it’s reach has simply been extended. As such, the existing concepts underpinning unfair contract terms remain in force.

What is the current regime?

Under the existing consumer contract term protection legislation a Court can declare an unfair contract term to be void, if it meets the requisite criteria. That is, if the term is unfair and if the contract is a standard form contract. A term will be “unfair” if a Court determines that:

  1. the contract term causes a significant imbalance in the parties’ rights and obligations under the contract;
  2. the term would cause a detriment (economic or otherwise) to a party if relied upon; and
  3. the term is not reasonably necessary to protect the legitimate interests of the party seeking to enforce it.

When deciding if a contract is a standard form contract, the test is not as clear. However, there are certain factors that the Court is required to consider including, for example, whether one party was required to accept or reject the terms on an “as is” basis and whether a party was given an effective opportunity to negotiate the terms.

Small business contracts

The legislative changes affect small business contracts. A contract will be considered a small business contract if, at the time the contract is agreed, one party is a small business (that is a business that employs fewer than 20 persons, excluding casual employees not employed on a regular systematic basis) and where the value of the contract does not exceed either $100,000.00, or $250,000.00 if its duration extends beyond 12 months.

The rationale for extending the existing provisions to small business contracts is that small businesses, like consumers, are more vulnerable to unfair terms in standard form contracts. Small businesses are considered more vulnerable as they lack the resources to effectively negotiate and are generally in a position of limited bargaining power.

The effect of the amendments on key contract terms

A Court will now be able to declare an unfair term of a standard form small business contract void, just as it can for an unfair term contained in a standard form consumer contract. If the Court declares a term void it will be removed from the contract (as though it never existed) and the remainder of the contract will be binding on the parties. The idea is that this will reduce the incentive to include and/or enforce unfair terms in small business contracts and thus provide a suitable remedy for small businesses.

How does this affect you?

The rationale behind these amendments indicates the Government’s emphasis on protecting small business from unfair contract terms. Therefore, it is important to review your current standard form contracts and to ensure that any negotiations for small business contracts are open and all terms are laid out on the table. Any indication of hiding terms in “fine print” will damage a party’s position before a Court in determining whether a contract term is unfair.

All businesses should review the enforceability of their standard term contracts to reduce the risk of any terms being declared void. It may be not possible to create a “one size fits all” standard contract, as when and if a term will be declared void will depend on the circumstances of each transaction and the perceived or actual bargaining power of each party.

Although the changes will not be enforced until November this year, now is the time to review your contracts to ensure they are compliant with the new regime.