The Federal Government has recently passed legislation which extends unfair contract term provisions to small business contracts.

We often see standard form contracts with clauses that impose an early termination penalty on customers, or which allow the supplier to make changes to its goods, services, or pricing without the customer’s consent.  Once the new legislation starts applying in November this year, clauses will not be allowed in small business contracts in standard form if they are ‘unfair’.

Whether you are a small business or whether you’re dealing with small businesses, this is a very important issue for all business owners to attend to.  Please read below for our recommendations on what you need to do prior to 12 November 2016.

What contracts are covered by the legislation?

The legislation covers small business contracts in standard form.  That means:

  1. the contract is for the supply of goods, services, land, financial products, or financial services;
  2. at least one party is a business that employs less than 20 people (full time, part time, or casuals employed on a regular and systematic basis);
  3. the price payable under the contract is:
    1. less than $300,000; or
    2. $1,000,000 or less if the contract is for longer than 12 months; and
  4. the contract employs standardised, non-negotiated terms which are prepared by one party to the contract.

The price payable under the contract is assessed on the total amount payable under the contract which is disclosed when the contract is being entered into.  The price payable doesn’t include interest payments, or amounts that are contingent and may not be payable (such as termination fees, surcharges, expenses, out-of-scope fees, etc).

Factors which are relevant in determining if a contract is a standard form contract include:

  • whether one party has all or most of the bargaining power;
  • whether the contract was prepared by one party before any discussion occurred between the parties;
  • whether one party was required either to accept or reject the terms of the contract in the form in which they were presented (ie, take it or leave it);
  • whether one party was given an effective opportunity to negotiate the terms of the contract; and
  • whether the terms of the contract were tailored to the specific circumstances of the agreement between the parties.

There are limited exclusions under the legislation, which are not likely to apply to clients of Idealaw (for example, contracts for marine salvage or towage).

What is an unfair term in a small business contract?

A term in a small business contract is unfair if it:

  1. causes a significant imbalance in the parties’ rights and obligations; and
  2. is not reasonably necessary to protect the legitimate interests of the benefitted party; and
  3. causes detriment (financial or otherwise) to the other party.

Terms which are required by law, or which define the main subject matter of the contract, or which set the price are exempt from being declared unfair.

Some examples of unfair terms are terms which enable only one party to:

  1. avoid or limit performance of the contract, or limit liability;
  2. vary, renew, or terminate the contract;
  3. vary the price or scope of what is being supplied without the other party being able to terminate the contract;
  4. assign the contract to the other party’s detriment without the other party’s consent;
  5. limit the other party’s right to sue;
  6. determine if a breach has occurred or interpret the meaning of the contract;
  7. levy excessive fees or impose excessive interest rates on outstanding monies; or
  8. impose a penalty for a breach or termination.

Terms that have previously been found by the Federal Court to be unfair include terms that:

  • allowed an ISP to vary the price for providing services to the customer without prior notice and without providing the customer with a right to terminate the contract;
  • required a customer to indemnify a supplier in all circumstances, even where the loss had been caused by the supplier’s breach of the contract or wilful misconduct; and
  • allowed only the supplier and not the customer to terminate the contract at any time, without cause or reason.

If your contract has such clauses, the clauses may be declared void (that is, it’s unenforceable).  The contract will then only continue to bind the parties if it can operate without the unfair term.  You may be able to retain the clauses if there is a legitimate business need to do so and a reasonable balance between the parties is struck.  There are no offences or penalties arising from including an unfair term in a small business contract, however if you attempt to enforce an unfair term, then remedies for the other party can apply, including court-awarded compensation.

What do you need to do?

If your contracts are covered by the legislation, and may contain unfair terms without a legitimate business need to do so or a reasonable balance in the overall contract, you have until 12 November 2016 to amend them.

Prior to 12 November 2016, we recommend:

  1. reviewing any standard form contracts used with small business to determine whether they contain any unfair terms;
  2. reviewing existing small business contracts to determine whether they may be considered standard form contracts, and if so, whether they contain any unfair terms; and
  3. amending any unfair terms found by the reviews.