Unfair Contract Terms provisions will soon extend to Small Businesses

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Table of Contents

• Commercial contracts these new provisions may affect
• When is a contract term unfair under current law?
• What should franchisors do when the Bill passes?
• When will these provisions come into force?
• Conclusion

On March 20 2015, the Small Business Minister, Bruce Billson, along the Prime Minister announced that the current Australian Consumer Law, specifically the unfair contract terms provisions, would be extended to protect small businesses entering into ‘standard form’ contracts. Currently the law is designed to protect consumers entering into these contracts.

Commercial contracts these new provisions may affect

Importantly, under the new legislative framework, franchise agreements are likely to be caught, placing franchisors on high alert. In general, franchise agreements are offered to new franchisees in standard from. They are ordinarily offered on a ‘take it, or leave it’, basis, which leaves little to no wiggle room for franchisees during the negotiation stages. In addition, the changes to the law might affect some of the standard form commercial contracts exchanged between a supplier and a customer, such as Software Licence Agreements.

When is a contract term unfair under current law?

Currently, an unfair contract term will exist when and if:

• It might lead to a significant imbalance between the contractual rights and obligations of each party;
• It does nothing (reasonable) to protect the legitimate business interests of the party that enjoys the benefit of the term in question;
• It may detrimentally affect one party, whether financially or in some other way.

Another example of an unfair contract term often found in consumer contracts may be a term that gives an exclusive right to one party to terminate the agreement or change its terms. These terms are not always going to be considered unfair, and the contract will typically be viewed as a whole by considering the facts and circumstances of each case.

When a term is found to be unfair in a standard form contract, the Courts will have the power to make the term inoperative. The Courts will usually uphold the remainder of the contract if the unfair contract term can be struck out without affecting the operation of the rest of the agreement.

What should franchisors do when the Bill passes?

Upon passing the Bill, it would be prudent for franchisors to have their documentation reviewed to locate and remove any unfair contract terms to ensure the contracts remain enforceable. Part of reviewing the franchise documents will mean ensuring they are in plain English and written in no uncertain terms. Franchisors are at risk of breaching the proposed legislation if their franchise agreement or disclosure documents are convoluted and imbalanced, which might lead to certain provisions becoming unenforceable.

When will these provisions come into force?

According to the Federal Government, the new provisions might be effective as soon as 1 July 2015, which should prompt franchisors to seek legal advice from a franchise solicitor as soon as practicable.

Conclusion

If you are running a business and wish to ensure your contracts do not contain unfair terms, you should contact a contract lawyer and conduct a review of your documentation in its current form. Give LegalVision a call on 1300 544 755 and speak with one of our experienced contract lawyers today for a fixed-fee quote and an obligation-free consultation.