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Unfair Contract Terms Alert

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From 12 November 2016 small businesses will be afforded the same protection that consumers currently have from unfair contract terms under the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015.

Businesses entering into supply contracts, for example, will need to determine if they will fall under the radar of this new legislation.

What does this mean?

Many standard form small business contracts entered into or renewed after 12 November 2016 will need to comply with the new legislation or parties risk finding that a particular term is void (by virtue of being deemed unfair). A party seeking to rely on that clause will then be unable to do so, which could have costly and catastrophic implications.

What types of terms could be deemed unfair?

The law sets out examples of terms that may be unfair, including:

  • Unilateral limitation of liability clauses – i.e. terms that enable one party (but not another) to avoid or limit their obligations under the contract;
  • Unilateral termination clauses – i.e. terms that enable one party (but not another) to terminate the contract;
  • Unilateral penalty clauses – i.e. terms that penalise one party (but not another) for breaching or terminating the contract; and
  • Unilateral variation clauses - i.e terms that enable one party (but not another) to vary the terms of the contract.

Ultimately, only a court or tribunal can decide that a term is unfair but to minimise the risk you should seek advice. An experienced commercial lawyer will be able to review your contracts and determine whether any clauses are likely to fall foul of the new legislation and re-draft your contracts accordingly.

What is the reason for the new legislation?

Small businesses are often vulnerable to unfair contractual terms in standard form contracts. The cost for a small business to obtain legal advice can often be perceived as disproportionate to the benefit of entering into such a contract. As a result, such contract terms can cause significant detriment to small business when enforced.

Extending the unfair contract terms protection to small business will attempt to compensate for this vulnerability by providing a mechanism to declare such terms void and unenforceable. This should deter the inclusion of such terms in small business contracts. 

What contracts will it cover?

The law will apply to standard form small business contracts entered into or renewed after 12 November 2016, where, for example:

  • It is for the supply of goods or services;
  • At least one of the parties is a small business that employs fewer than 20 people; and
  • The contract is for a relatively low value, i.e. if:
  • The upfront price payable is no more than $300,000; or
  • The contract lasts for longer than 12 months and the upfront price payable is no more than $1,000,000.

Types of things to be aware of

Parties entering into standard form business contracts must look to:

  • The nature of the contract;
  • The parties to the contract;
  • The value of the contract; and
  • The duration of the contract (in certain circumstances).

What is a standard form contract?

A standard form contract is outlined in the legislation. But, it will be presumed that a contract is a standard form contract unless a party proves otherwise. When looking to make a determination, a court may take into consideration:

  • The relative bargaining powers between the parties;
  • Who prepared the contract and whether there was any discussion with the other party; and
  • Whether the accepting party had the opportunity to alter or negotiate the terms of the contract prior to accepting the contract.

In practice, standard form contracts are often characterised by one party drawing up the contract and the other must choose to ‘take it or leave it’.

What do you need to do?

If you require further information; please do not hesitate to contact us.

Our Corporate and Commercial Lawyers can review your standard form contracts and determine whether they are likely to fall within the new legalisation and whether any of the clauses are likely to be deemed ‘unfair’ and therefore need redrafting. 

Contact

For further enquiries, please contact:

Helen Kay
Head of Corporate & Commercial
hkay@pmlawyers.com.au
T – 08 9321 0522

The content of this article is intended to provide a general overview and guide to the subject matter.  Specialist advice should be sought about specific circumstances