The unfair terms laws will apply to “standard form” small business contracts. A “small business contract” is a contract between businesses in which one party has fewer than 20 employees and where the upfront price payable under the contract is less than:
- $300,000; or
- $1m if the contract is for more than 12 months.
A contract will be classed as a “standard form contract” if it is a contract that is prepared by one party and which is offered to the other party on a “take it or leave it basis”.
The changes mean that where a provider seeks to enforce a contract entered into on or after 12 November 2016 against a supplier, the supplier will now have the ability to challenge a term as being “unfair”. Whether a term is unfair is a matter to be determined by the court which must consider:
- Whether the term would cause a significant imbalance in the parties’ rights and obligations;
- Whether the term is reasonably necessary to protect the legitimate business interests of the party to be advantaged by the term; and
- Whether the term would cause detriment to the other party if it were to be relied upon.
The court has to look at the contract as a whole and consider the transparency of the term in assessing whether a term is unfair. A term that is buried in the fine print is more likely to considered unfair although even terms in large, bond print can be unfair.
The main consequence of a term being declared unfair is that it cannot be enforced against the supplier. The rest of the contract will still stand but if a term is declared to be unfair, providers will need to be mindful of the risks of continuing to rely on the term as against any other supplier.
There are also more direct financial consequences because the use of unfair terms may also constitute misleading or deceptive conduct which can attract pecuniary penalties.
Examples of terms in the aged care supplier context which could potentially be classed as unfair include:
- A term granting an aged care provider an indemnity from a supplier which applies even where the provider is in breach of its obligations.
- A term which gives the provider the right to terminate even for a minor, inconsequential breach but which limits the supplier’s rights to terminate.
- A term that gives the provider the right to unilaterally vary the contract, for example, by requiring the supplier to comply with all the provider’s policies and procedures as these change over time.
What you need to do
The unfair terms provisions will only apply to:
- contracts entered into after 12 November 2016; and
- any variations to an existing contract made after that date.
For this reason, providers may wish to review their supplier list, identify which suppliers may be subject to the prohibition and renew any contracts (where possible) before November 2016.
Providers intending to enter contracts with new suppliers who fall into the definition of a “Small Business” or renew any contracts with existing Small Business suppliers should consider reviewing the terms of their standard form contracts to assess whether there are any terms that may be subject to the new provisions.