In November 2015, the Federal Government passed new legislation to protect small businesses from unfair terms in standard form contracts. The Australian Securities and Investments Commission Act 2001 (Cth) and the Competition and Consumer Act 2010 (Cth) were also amended to reflect these changes. The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) will come into effect on the 12th of November, 2016.
Small businesses or anyone contracting with a small business should now go back and review their standard form contracts and ensure that they can enforce their terms.
1. What are Small Business Contracts?
Contracts that now attract protection under the new legislation are those where:
- At least one party to the contract has less than 20 employees;
- The contract is a standard form contract;
- The up-front value of the contract is under $300,000, or if the contract continues over one year, then under an up-front value of $1,000,000; and
- The contract is entered, renewed or varied after the 12th of November, 2016.
Businesses typically use standard form contracts as they are faster and cheaper to create. However, small businesses can then be more vulnerable to the contract’s terms. When determining whether your contract is a standard form contract, you should consider the following:
- Are the contract terms negotiable?
- Does one party have all the bargaining power?
- Is the contract ‘take it or leave it’?
- Did one party prepare the contract?
Importantly, the new legislation protects not only small businesses against unfair contract terms but also other parties against any unfair contract terms proposed by small businesses. In short, the new legislation recognises that small businesses can both be the victim, and perpetrator of unfair terms and offers equal protection to all parties.
2. What is an “Unfair Contract Term”?
An unfair term is one that satisfies the three criteria below:
- Causes significant imbalance in the parties’ rights and obligations;
- Is not reasonably necessary to protect the legitimate interests of the benefited party; and
- Causes detriment (both financial and non-financial) to the other party.
Examples of unfair terms would include:
- Where only one party is penalised for breach or termination of the contract;
- Where only one party can vary the terms of the contract; or
- Where only one party can terminate the contract.
3. What Happens if There is an Unfair Term?
If there is an unfair term found in a contract and the matter is before a court or tribunal, then the court or tribunal may declare the term ‘void’. Once the term is found to be ‘void’, it will be removed from the contract, and the remainder of the contract will continue to bind the parties. If the contract is unable to operate without the voided unfair term, then the contract may be found to be unenforceable.
4. What Does This Mean for You?
Small businesses, anyone contracting with small businesses and any franchise agreements that fall within the definition of a small business contract should review the terms of their standard form contracts. It is necessary to determine whether any terms may now be considered unfair under the new legislation and to remove or amend them. By reviewing your contract terms, you will minimise the risk that a court or tribunal find your terms or contracts void.
Questions? Get in touch on 1300 544 755.