Long awaited new laws in Australia will soon protect small businesses from unfair terms in standard form contracts. Here are six key things you need to know about these changes.
1. When will the new protections come into effect?
The new protections contained in the Australian Consumer Law and Australian Securities and Investments Commission Act, will start applying to standard form contracts entered into, varied or renewed on or after 12 November, 2016 where:
- The contract is for the supply of goods, services, interests in land, financial products or financial services;
- At least one of the parties is a small business; and
- The upfront price payable under the contract is no more than $300,000 (or $1 million for contracts which continue for more than 12 months).
2. What is a ‘standard form contract’?
Usually, a standard form contract is one that has been prepared by one party to the contract and where the other party has no real opportunity to negotiate the terms. The relevant factors include:
- Whether one of the parties has all or most of the bargaining power in the transaction;
- Whether the contract was prepared by one party before any discussion occurred between the parties about the transaction;
- Whether the other party was, in effect, required to either accept or reject the terms of the contract in the form in which they were presented;
- Whether the other party was given any real opportunity to negotiate the terms of the contract; and
- Whether the terms of the contract take into account the specific characteristics of the other party or the particular transaction.
3. What protections are being introduced?
Small businesses will be given the ability to apply to a Court or Tribunal to challenge unfair terms in standard form contracts. If a Court or Tribunal determines that a contract term is unfair, the term will be void and will not be binding on the parties. Other remedies such as compensation may also become available, depending on the circumstances. Contraventions of the new laws may also become the subject of enforcement action by the ACCC or ASIC.
4. How is a ‘small business’ defined?
A small business is defined as employing less than 20 people, including casual employees employed on a regular and systematic basis. The number of employees is counted as at the time the contract is entered into. It may be difficult to be sure about the number of employees another business has. If in doubt, it is safest to assume you are dealing with a small business for the purpose of the new laws.
5. What types of contract terms may be ‘unfair’?
A contract term is typically unfair if:
- It would cause a significant imbalance in the parties' rights and obligations arising under the contract;
- It is not reasonably 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.
Examples of contract terms that may be unfair include:
- Terms that enable one party (but not another) to avoid or limit their obligations under the contract;
- Terms that enable one party (but not another) to terminate the contract;
- Terms that penalise one party (but not another) for breaching or terminating the contract; and
- Terms that enable one party (but not another) to vary the terms of the contract.
The question of whether a particular contract term is unfair under the new law can be complex. A Court or Tribunal must consider how transparent the term is and the overall rights and obligations of each party under the contract in addition to a range of other factors which may be taken into account.
6. Are there any exceptions?
The new laws specifically exclude certain kinds of contracts and certain kinds of terms. These include:
- Constitutions of companies, managed investment schemes or other kinds of bodies;
- Certain insurance contracts, including car insurance;
- Shipping contracts;
- Contract terms that define the main subject matter of the contract;
- Contract terms that set the upfront price payable; and
- Contract terms that are required or expressly permitted by a law of the Commonwealth, or a state or a territory.
Next steps for small businesses
Whether you are a small business or you are dealing with a small business, you need to know if any of your standard contracts or terms may be caught by the new laws. You should seek legal advice to ensure you know your rights and the potential consequences that may arise. You should also obtain legal advice before taking any action to challenge any contract term you believe to be unfair.
If you need legal advice relating to matters concerning small businesses, you can reach us here