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Unfair contract terms and small businesses

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From 12 November 2016, new laws will allow unfair contract terms in some small business contracts to be declared invalid.  This will give small businesses a remedy when unfair terms are enforced against them.

The new laws cover standard form small business contracts entered into or renewed from 12 November 2016.  Unfair contract terms in such contracts may be declared void.

A term in a standard form small business contract will be unfair if:

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

Unfair contract terms may include terms that permit one party (but not the other party) to:

  • terminate, vary, renew or not renew the contract;
  • avoid or limit performance of the contract;
  • vary the upfront price payable under the contract, without the other party having a right to terminate the contract;
  • unilaterally vary the characteristics of the thing to be supplied under the contract;
  • unilaterally interpret the contract’s meaning or decide that it has been breached.

Small business contracts

A contract is a ‘small business contract’ if:

  • one of the parties is a business with less than 20 employees, including casual employees employed on a regular and systematic basis;
  • 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; and
  • the contract is:
    • for a supply of goods or services;
    • for a sale or grant of an interest in land;
    • a financial product; or
    • for the supply, or possible supply, of financial services.

Standard form contracts

 A ‘standard form contract’ is not defined in the legislation, because all contracts are presumed to be standard form contracts, unless proven otherwise.

Standard form contracts are typically prepared by one party without negotiation, and are often put on a ‘take it or leave it’ basis.

A court must consider certain matters in determining whether a contract is a standard form contract, including:

  • the parties’ bargaining power relating to the transaction;
  • whether there was any prior discussion before one of them prepared the contract; and
  • whether there was an effective opportunity to negotiate the contractual terms.

Exemptions

The unfair contract term laws do not apply to:

  • a contract of marine salvage or towage;
  • a charterparty of a ship;
  • a contract for the carriage of goods by ship; or
  • a constitution of a company, managed investment scheme or other kind of body.

Compliance

The new laws were passed on 12 November 2015, and there is a 12-month transition period to review their contracts.

For more information, see the ACCC website.  For financial products, see the ASIC website.

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About

Rachel Lamb     rlamb@taylorsmart.com.au
Rachel Lamb is a member of our Commercial Litigation practice group. She has previous experience working in the commercial law department of a well recognised commercial law firm. Rachel currently provides advice and representation in dispute resolution matters including in the areas of contractual disputes, and property, consumer and corporations law.

Peter Nevin     pnevin@taylorsmart.com.au
Peter Nevin is a Partner in our Commercial Litigation practice group. He specialises in commercial and general litigation, and provides detailed advice on industrial relations issues to both employers and employees. He also provides advice and representation in estate disputes on behalf of executors, beneficiaries and third party claimants.

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