Small businesses that enter standard form contracts on or after 12 November 2016 will be protected by a new unfair contract regime. With roughly 70% of all road freight operators having only one employee (and one truck) in their fleet, and therefore squarely falling within the definition of a small business, the new regime will be of particular relevance.  The legal and economic implications of the new regime will be closely watched given the wider freight and logistics industry accounts for 10 per cent of GDP.

Smoothing the sharp edges of commerce

The new regime attempts to protect vulnerable parties in commercial exchanges. Unfair contract protections already exist in the Australian Consumer Law (ACL) for consumer contracts. From 12 November 2016, small businesses who enter standard form contracts — typically these are “take it or leave it” contracts — will, provided the upfront value of the contract is below $300,000 or $1 million if the contract is for more than 12 months (prescribed amounts), be covered by the regime. A small business is a business employing fewer than 20 employees; casual employees employed on a regular and systematic basis will be counted in the number of employees.

The new regime and transport

Contracts for the carriage of goods by ship (shipping contracts) will not fall within the new regime. The current unfair contract regime already excludes these given an extensive body of admiralty law covers these contracts. However, a standard form contract for the transport of freight by road between contracting parties where one is a small business, assuming the contract’s value is below the prescribed amounts, will fall within the regime. It is also important to note the regime will also cover a standard form contract between two small businesses.

When is a term unfair?

It is the role of a Court to determine whether a contract term is unfair. A term will be unfair if it:

  1. causes a significance imbalance in the parties’ rights and obligations under the contract; and
  2. is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Determining the fairness or unfairness of a term requires a case-by-case assessment. This includes an analysis of whether the term is transparent — a term written in plain language and brought to the attention of the other party. In determining whether a term is unfair, a Court will consider the contract as a whole.

Examples of unfair contract terms in the trucking context

Unilateral variation terms

These allow one party to unilaterally vary a term without the consent or without reasonable notice to the other party. Although in a different statutory context, in Keldote Pty Ltd & Ors v Riteway Transport Pty Ltd 2008] FMCA 1167 a contract was considered unfair when a term provided the principal contractor a unilateral right to require the contractor to provide a different type of truck to perform the contract without any corresponding increase in payment rates.[1] The contract in this case was not considered unfair solely because of the unilateral right requiring the contractor to change its truck. Rather, unfairness also stemmed from the lack of any corresponding obligation on the part of the principal contractor to compensate the contractor for the costs of changing its fleet.

Exclusion of liability

These terms operate to exclude or limit a party’s liability for loss, even in some cases if that party is responsible for the loss.

Unnecessarily confined notice and limitations periods

Typically, contracts for the cartage of freight will provide a fixed-time period for the notification of incidents which amount to contractual breach. However, if notice is not provided within this set period, liability limitations or other exclusions take effect. Terms may also place time limitations on when proceedings can commence in respect to the breach of the contract.

Under the new regime, a Court will determine whether a term is unfair by considering the contract as a whole. Unless a legitimate commercial interest exists as to why the term is necessary — bearing in mind the party who seeks to rely on the term bears the onus in proving its legitimacy — there is a real prospect that such terms would be considered unfair.

Practical implications for the industry

If a Court determines a term unfair, it will be held not to bind the parties. The contract will continue to bind the parties if the contract can operate without the term. Either a party to the contract or the ACCC may commence proceedings in a Court. As a cartage contract is not a consumer contract, proceedings cannot commence in the New South Wales Civil Appeals Tribunal (this jurisdiction can be used in the case of unfair contract terms in consumer contracts).

What if a term is unfair and the contract is unlawfully terminated under the new regime?

Assuming a contract to which the regime applies is terminated unlawfully and the party who has terminated the contract has relied upon an unfair term in terminating, does the new regime offer any additional remedies to the innocent party?

The ACL entitles a party to seek compensation for any loss suffered because of an unfair contract term, provided the contract term has been declared unfair. In NSW only, the Secretary of NSW Fair Trading or the Supreme Court can declare a contract term to be unfair. Once such a declaration is made, the innocent party is entitled to seek compensation for the unlawful breach. In these circumstances, a Court is not limited to awarding damages according to the law of contract or tort. Simply, the award for damages may be larger than if the claim were brought under a claim for breach of contract alone.

Bottom line

Ensure contract terms are not unfair. We stress though, the new regime should not be taken as meaning that contacts cannot contain terms that advantage one contracting party over the other. However, if a term provides an advantage to one party, it should do so legitimately. Additionally, a Court when reading the contract as a whole will consider whether an unfair term is balanced out by other fairer terms.

For the transport industry, the new regime will be particularly relevant. Careful consideration of all contracts falling within the regime is an absolute necessity.