Changes are coming to unfair contract terms in standard form contracts for small businesses

On 12 November 2016, changes to the Australian Consumer Law come into effect regarding unfair contract terms for standard form contracts entered into or renewed after that date by small businesses.

A small business is defined as “a business employing fewer than 20 people, including casual staff employed on a regular and systematic basis”.

These changes acknowledge that like consumers, small businesses have a limited ability to vary “take it or leave it” contracts and sufficiently protect their interests.

If a term is found to be unfair it will be void. The rest of the contract will continue to bind the parties if the void term does not render the contract inoperable.

Is my contract affected?

The unfair contract term provisions will apply to standard form small business contracts where:

  1. the contract is for the supply of goods or services or a sale or grant of an interest in land;
  2. one of the parties is a “small business”;
  3. the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months; and
  4. they are not exempted or excluded pursuant to the Australian Consumer Law or ASIC Act.

When considering whether to rely on these provisions, the law states that there is a presumption that the contract is a standard form contract. That is, the other side must prove it is not.

What is an unfair term?

An unfair term is a term that:

  1. causes significant imbalance between the parties’ rights and obligations;
  2. is not reasonably necessary to protect the legitimate interests of one party; and
  3. would cause detriment to a party if it were relied on.

Some examples of unfair terms include those that:

  1. allow one party to terminate the contract for a trivial breach;
  2. give one party the right to renew or not renew the contract; or
  3. allow one party to vary the terms of the contract without the other party agreeing.

Will franchise agreements be covered?

Yes, unless the Commonwealth Minister determines that the Franchising Code of Conduct already provides enforceable protections for small businesses.

What do I need to do now?

Prior to the commencement of the new law, affected businesses should take steps to ensure that their contracts are compliant and consider:

  1. reviewing contracts with small businesses; and
  2. reviewing contracts that are coming up for renewal, new contracts and existing contracts.

DSS Law’s team of commercial lawyers are experienced in advising large and small businesses in relation to their contracts and enforceability and can provide advice on how you or your business might be affected by the new changes.

16/08/2016

DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on epost@dsslaw.com.au.