Take away tips:

  • If you are a supplier that deals with small business, and you use standard form (i.e. take it or leave it) terms and conditions for your offering, you should have them professionally reviewed before 12 November 2016. Your standard form contracts must comply with the unfair contracts terms law to ensure they will continue to remain enforceable after that date.
  • If you are a small business, be aware that from 12 November 2016 you are going to have more rights to complain about standard form terms and conditions from your suppliers that the consumer law considers to be unfair.

If you regularly read LV articles, you will already know that the Australian Consumer Law (ACL) unfair contracts terms provisions will extend to small businesses as of 12 November this year.

A year, however, is a long time in politics and business, and it’s easy to forget over the course of such a long grace period that this reform is likely to impact your business significantly. So, if you are a business that provides other businesses with goods or services, or holds an interest in land under standard (non-negotiable) contract terms, listen up.

Until now you have had a blank cheque (within the usual commercial constraints of course) as far as the conditions of your offering are concerned. That is not to say of course that you have been allowed to act unconscionably or in a misleading and deceptive way towards your customers under the ACL. Those prohibitions have been in place for many years, and they protect small business as well as ordinary consumers.

By way of example, The Community Network last year tried to lock some of their small business customers into their contracts for the supply of advertising services. The Australian Competition and Consumer Commission (ACCC) in response took the Network to court for both misleading and deceptive conduct and unconscionable conduct in business transactions.

Come 12 November 2016, those small businesses trying to get out of such a relationship are likely to be able to walk away, without the need for the ACCC to get involved. For example, if the type of provision locking them in is a standard “evergreening” clause, the supplier cannot enforce this type of clause as it may fall foul of the unfair contracts law. An ‘evergreening’ clause is where the service provider’s terms state that the contract automatically renews itself periodically for a year or more at a time unless terminated with notice.

Depending on the size of the contract, and how aggressive the supplier is, the small business may wish to go on the front foot and approach a consumer tribunal such as the NCAT for an order that the contract term is unenforceable. Or, if the supplier takes proceedings against them for wrongful termination, plead unfair contract terms in its defence. Either way, this gives the small business options it did not previously have when faced with this type of problem.

What is a Small Business?

By way of refresher, a “small business” for this reform is one that satisfies the following: 

  • Has a workforce of fewer than 20 employees; and 
  • The value of the contract must not exceed $300,000 in 12 months or $1 million for contracts that run for a period greater than one year.

That covers a lot of businesses and a lot of contracts!

Irrespective of the size of the supplier’s business, it is possible (and indeed, likely), that we will see many cases fought between two small businesses under the above definition. 

That is why we are encouraging all suppliers, large and small, to review their standard contract terms before 12 November 2016, to ensure that they are going to be enforceable against their small business customers. The alternatives are unwanted publicity and potential damage to your business reputation if you do try to enforce them against a well read or advised customer who knows their rights. No supplier wants that.

What Should I Look For When Reviewing My Contracts?

The sorts of things we look for (in layman’s terms) when reviewing customer’s terms for compliance with the unfair contracts terms law are the following:

  • Is the term very one-sided in favour of the supplier? Does it penalise the customer and not the supplier, or provide the supplier with unilateral rights (for example, to terminate or vary the contract unilaterally)? 
  • Is the term more than is reasonably necessary to protect the business interests of the supplier in the context of the overall contractual relationship? For example, a payment adjustment clause in favour of the supplier may be OK provided that the contract also provides for an easy and quick option for the customer to exit the contract if it doesn’t like a price increase.
  • Is the term likely to cause detriment to the customer (financial or otherwise) if the supplier insisted on enforcing it? For example, if a term seeks to lock the customer into an existing fixed term service contract when a more cost effective solution becomes available in the meantime.

If the answer to any of the above questions is “yes”, there is a risk that the term would be considered unfair for ACL purposes, and it needs to be carefully re-examined and possibly redrafted so that it will continue to remain legally effective.

Key Takeaways

There are a number of decided cases on the existing unfair contracts law that provide us with guidance when we are advising our supplier clients on these matters, as consumers have had the benefit of these rights for some years now. The industries that have featured most prominently in these cases and a major industry review into unfair contracts terms conducted by the ACCC in 2013 are the airlines, telecommunications, fitness and vehicle rental industries. Online services and travel agency contracts have also been the subject of scrutiny. Questions about your standard term contracts? Get in touch with our business and commercial lawyers on 1300 544 755. 

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