Changes to Unfair Contract Terms

The recent Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 extends unfair contract protections from individual consumers to now include small businesses.

The legislation is designed to address the perception of vulnerability for some small businesses in their commercial dealings with larger counterparties.

Details of legislative changes

In relation to standard form contracts (including financial services contracts) the changes to the legislation apply when:

  • at least one party to the contract is a small business (i.e. business employing fewer than 20 people)
  • the upfront price payable under the contract is less than $300,000 or $1,000,000 if the duration of the contract is more than 12 months
  • the contract is for a supply of goods or services, or a sale or grant of an interest in land

The importance of unfair contract protections

In general terms, small businesses may have very little leeway or power to negotiate terms when dealing with standard form contracts with larger businesses. Often entry into these types of contracts is offered on a ‘take it, or leave it’ basis. However, this legislation now provides some protection in favour of small businesses such that unfair terms may not be enforceable against them.

Under the Australian Consumer Law, a term is considered unfair if it:

  • “would cause a significant imbalance in the parties’ rights and obligations, arising under the contract”;
  • “is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term”; and
  • “would cause detriment (whether financial or otherwise) to a party, if it were to be applied or relied on” (refer s 24 Australian Consumer Law).

But what deems a term unfair? To make the determination, the court takes the whole contract into account and including whether the particular clause is ‘transparent’ – ie: in easy-to-understand English, legible and clear and readily available.

Understanding who the extension of the laws apply to

The legislative changes are applicable to:

  • any contracts entered into on or after 12 November 2016;
  • applicable contracts renewed on or after 12 November 2016 – for conduct after that date; and
  • a term of an applicable contract which is varied on or after 12 November 2016 – for that term.

It’s important to note that laws will not apply to a pre-existing contract that is assigned on or after 12 November 2016, unless the incoming party enters into a new contract.

The consequences of a contract with unfair terms

The main ramification of determining that a term in a standard contract is unfair is that the term will be void.

However, the remainder of the contract will continue to bind the parties if the contract is able to operate without the unfair term.

If a term is found to be unfair by a court, there may be a range of orders made. These include:

  • varying the contract;
  • declaring part or all of the contract to be void; or
  • a court refusing to enforce some or all of the terms of a contract.

The new legislation means that businesses dealing with small businesses (and small businesses themselves) should be mindful of potentially unfair provisions in their contracts and update them where appropriate to ensure enforceability.

 

Note: This insight contains commentary for general reference purposes only. It does not constitute legal advice and should not be relied on for any purpose. You should always seek specific legal advice based on your own individual circumstances.