New laws came into operation over the weekend that allow small businesses to challenge the validity of unfair terms in standard form business-to-business contracts.
The new laws will apply to any new contracts, or renewals or variations of existing contracts on or after 12 November 2016, where:
- the contract is a 'standard form contract' - which is a contract that is essentially presented on a 'take it or leave it' basis and not subject to negotiation (except as to terms like price and the specification of goods/services). There is a presumption that a contract is a standard form contract unless proven otherwise; and
- one party to the contract is a 'small business' - which is defined to be an entity with less than 20 employees (includes casual employees if they are employed on a regular and systematic basis); and
- the 'upfront contract price' is less than $300,000 or, if the contract is longer than 12 months, $1 million - the upfront contract price includes any amounts that can be calculated at the commencement of the contract and excludes any amounts contingent on other events.
A term of a small business contract will be considered unfair if:
- there is a significant imbalance in the parties' rights and obligations;
- the term is not reasonably necessary to protect the legitimate interests of the party advantaged by the term (and there is a presumption that the term is not necessary); and
- the term will cause detriment to the other party if relied upon.
A court must also take into account the transparency of a term and the contract as a whole.
If a term is considered unfair by a court or tribunal, that term can be declared void and struck out of the contract. The rest of the contract will continue if it is capable of operating without the term.
The ACCC has recently released its report into the review it undertook of standard form contracts in selected industries including retail leasing, independent contracting and franchising. The report provides some insights into the types of clauses the ACCC will consider unfair and drafting changes that may address those concerns.
If the new laws capture the types of contracts entered into by your organisation, it would be prudent for those contracts to be reviewed and for any potentially unfair terms to be amended so as to mitigate the risk of such terms being challenged by small business counterparties or a regulator.