In October last year, the Federal Government introduced a suite of reforms to the Australian Securities and Investment Commissions Act 2001 and Schedule 2 to the Competition and Consumer Act 2010 relating to the legality of ‘unfair terms’ in standard-form contracts. These amendments, in short, seek to extend the protections that are currently afforded to consumers with respect to ‘unfair contract terms’ to another contracting party that is often left vulnerable to the execution by large entities of opportunistic bargaining power – Australian small businesses.

These legislative changes are due to come into effect on and from 12 November 2016 and will have an impact on all commercial negotiations involving ‘standard-form contracts’ where at least one party to the contract is a ‘small business’.[1]

What is a standard form contract?

A standard form contract is typically a ‘take it or leave it’ contract where the opportunity to negotiate the contract terms is limited – this includes (by way of example) business loan contracts, broker agreements, credit card contracts and contracts relating to the sale or grant of interest in land.  Small businesses, given their size, are often vulnerable to ‘unfair terms’ being included in standard-form contracts and have little ‘leverage’ to negotiate out of such terms.

Corporations that regularly use standard-form contracts in their commercial dealings with small businesses should take steps to review their standard contracts and remove any unfair terms prior to the 12 November 2016 deadline. Failure to do so will expose the business to potential enforcement action.

How will the legislative changes regulate standard-form contracts?

The new amendments will operate to:

  1. allow unfair terms in small business contracts to be declared void; and
  2. allow the contract to continue without that term (where possible).

By introducing these amendments, the Federal Government has sought to ‘level the playing field’  by shifting the allocation of risk away from small businesses such that certain ‘unfair’ terms, which historically would have adversely affected small-businesses, can no longer be enforced.

What is ‘unfair’?

For a term to be considered ‘unfair’ it must satisfy the following 3-limbed test:[2]

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Determining the fairness or unfairness of a term requires a case by case assessment. This includes an analysis of whether the term is ‘transparent’.[3] A term will be ‘transparent’ if it is written in reasonably plain language, and brought to the attention of the other party. [4]

Subject to satisfying the ‘three-limb’ test set out above, examples of potentially ‘unfair terms’ may include terms that, inter alia:

  1. cause a significant imbalance in the parties’ rights and obligations;
  2. prejudice one party’s rights to terminate the contract or vary the terms of the contract; and
  3. are not reasonably necessary to protect the legitimate interests of the party benefiting from the term.

Examples of terms may potentially be unfair?

The following sets out a list of terms that may be construed as ‘unfair’ under the new legislative changes.

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It is important to remember that terms will not be considered in isolation. That is, when assessing whether a term should be construed as ‘unfair’, the court (a) will consider the contract as a whole; and (b) may also consider pre-contractual conduct.[6]

The ‘take-home’ message

  • All standard-form contracts should be screened for potentially unfair terms and amendedbefore the 12 November 2016 deadline.
  • Although the new laws will protect small businesses, large corporations should also take note, particularly if the corporation relies on standard-form contracts to transact with small businesses.
  • The necessity for clear, simple, non-legal language is paramount.
  • The careful use of style — including font sizing and bolding — and the positioning of a term (i.e. if a the term is buried at the end of the contract) will be relevant in determining whether a term has been brought to the attention of the other party.