The unfair contract terms protections under the Australian Consumer Law was extended to protect small businesses from 12 November 2016.  In this blog, we will examine the far reaching implications of this change on operations of businesses, particularly for those businesses that rely on standard form contracts.

To whom and what does the Act apply?  

The unfair contract terms regime under the Australian Consumer Law was previously only afforded to individual consumers. The Federal Government passed the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (“Act”) in November 2015 which came into effect on 12 November 2016. The Act applies to standard form contracts entered into or renewed on or after 12 November 2016. If a contract is varied on or after 12 November 2016, the law applies to the varied terms.

Standard form contracts are not negotiated by parties with equal bargaining power. Instead their defining feature is that one party decides the terms of the contract and the other is given little or no opportunity to negotiate, on a ‘take it or leave it’ basis. Under the Act, contracts are presumed to be standard form, with the burden falling on the party that drafted the contract to establish otherwise.  Examples include online terms and conditions, supply, support, manufacturing, licensing or service contracts

The law applies to standard form contracts where:

  1. It is for the supply of goods or services or the sale or grant of an interest in land;
  2. At least one of the parties is a small business. A small business is considered to be one which employs less than 20 people, including casual employees, on a regular basis;
  3. The upfront price payable under the contract is no more than $300,000 or $1 million if the contract is for more than 12 months.

The Act provides several exceptions. Shipping contracts, constitutions of companies or other bodies and some insurance contracts are exempted from the operation of the Act. Contract terms that define the main subject matter of the contract (e.g. the goods or services that the party is purchasing under the contract), set an upfront price or are required by legislation are also excluded.

What is an unfair contract term?

A court of tribunal determines whether a term is unfair. For a term to be unfair, it must:

  1. cause a significant imbalance in the parties’ rights and obligations;
  2. not be reasonably necessary to protect the legitimate interests of the party who would be advantaged by theterm; and
  3. cause detriment (whether financial, delay or otherwise) to a small business if it were relied on.

Courts will consider if the term is unfair with regard to the contract as a whole, including any other terms that may offset the unfairness of the term. This means an unfair term in one contract may not be unfair in another. The Court will also consider whether the term is ‘transparent’, that is whether it is clearly expressed and presented and able to be invoked by any party affected by the term.

Some examples of unfair contract terms include:

  1. terms that enable one party (but not another) to avoid or limit their obligations under the contract
  2. terms that enable one party (but not another) to terminate the contract
  3. terms that penalise one party (but not another) for breaching or terminating the contract
  4. terms that enable one party (but not another) to vary the terms of the contract
  5. terms that provide for automatic renewal without the other party’s consent
  6. terms requiring one party (but not another) to indemnify the other for any damage caused, even if it is caused by the other party’s negligence.

Consequences under the Act

If a term is found to be unfair, the term will be void, i.e. not binding on the parties. The contract will remain in operation between the parties to the extent that it can without the unfair term. This may result in a party being unable to enforce rights it may otherwise have.

The extension of the unfair contracts regime empowers small businesses in situations in which their lack of resources and know-how has often been taken advantage of by larger entities. Small businesses should examine standard form contracts for terms that may be unfair in order to take advantage of this protection.

Businesses relying on standard form contracts should review these contracts immediately to determine whether any of the terms may be considered ‘unfair’. Greater negotiation of contracts between parties may also be considered as a strategy to mitigate the risks, as negotiated contracts are less likely to be considered standard form.

Contact us to ensure that your business practices are aligned with this new legislation and don’t expose you to challenge.