Changes to the legislative framework on unfair contracts came into effect on 12 November 2016, which extend the law on unfair contracts to small business contracts. Small business contracts entered into, extended or varied after 12 November 2016 will be captured by the changes and consequences can apply to those contracts found to contain any unfair terms.

The law on unfair contracts has always existed to protect individual consumers who are generally in a weaker bargaining position than the party with whom they are entering into contractual relations with. The new amendments to the Australian Securities and Investments Commission Act 2001 (Cth) and Schedule 2 (Australian Consumer Law) of the Competition and Consumer Act 2010 (Cth) alter the legislative framework in this area and recognise that small businesses also have a weak bargaining position when entering certain types of contracts.

What is a small business contract?

The legislative changes provide a new definition of a small business contract. The definition has three parts, all of which must be satisfied:

  1. the contract is for a financial product or the supply of possible supply of financial services (ASIC Act); or for the supply of goods and services, or a sale or grant of an interest in land (ACL);
  2. the upfront price payable under the contract does not exceed $300,000, or $1,000,000 if the contract is for more than 12 months; and
  3. at the time the contract is entered into, one party to the contract employs fewer than 20 persons (this includes casual employees that are employed on a regular and systemic basis).

What contracts does the legislation apply to?

The changes will only apply to contracts entered into, renewed or varied on or after 12 November 2016 and apply only to 'standard form' small business contracts.

These contracts are those ‘take it or leave it’ type contracts where one party holds all of the bargaining power and there is no contract negotiation. The legislation specifically excludes certain contracts, including shipping and some insurance contracts and also excludes certain terms, including those which define the main subject matter or set the upfront price payable.

What is an unfair term and how is it determined?

Generally speaking, an unfair term is one which causes a significant imbalance in the rights and obligations of the parties to the contract, is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term and would cause detriment (financial or otherwise) to a party if it were to rely on the term. Examples of terms that may be unfair include terms that enable one party, but not the other:

  • to vary either the terms of the contract, the price of the contract or the goods or services to be supplied under the contract;
  • to avoid or limit their obligations under the contract;
  • to terminate the contract;
  • to renew or not renew the contract;
  • rights to sue under the contract; and
  • rights to assignment with no consent from the other party to its detriment.

Only a court can determine whether a contract term is unfair. The party claiming that the term is unfair must prove that there is an imbalance in the rights of the parties, and the term is presumed to not be reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term. On finding that a contract contains an unfair term, a court can provide a number of forms of relief including declaring the term (but not the contract) void, refusing the enforce an unfair term, awarding damages or compensation order, directing a party to provide specific services or redress or granting an injunction preventing reliance on an unfair term.

What does this mean for you?

Standard form contracts are an efficient and cost-effective means for organisations to enter into all sorts of necessary contractual arrangements for the general operation of business. Organisations entering into these agreements with small businesses should review their current standard form contracts so as to ensure compliance with the new legislation. Equally, small businesses should be aware of these new protections and ensure that any ‘standard form’ contracts entered into do not contain any terms which may be unfair. Gadens can provide support to businesses navigating these legislative changes. Please contact us for further assistance and advice in this area.