Small business update: Changes to unfair contract provisions of the Australian Consumer Law

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As of 12 November 2016 all standard form contracts entered into, renewed, or varied for:

  • the supply of goods or services;
  • the sale or grant of an interest in land; or
  • the supply of financial products or services,

where at least one party to the contract is a small business, are protected by statutory provisions against unfair contractual terms. If an unfair contract term is found in one of these contracts, the term will be void. It will be treated as if it never existed. The remainder of the contract will remain unaffected.

These new protections are found in Australian Consumer Law[1] and the Australian Securities and Investments Commission Act 2001 (Cth).

Provisions protecting consumers against unfair contract terms have previously existed in these statutes. The amendments merely extend the protections to small businesses.

What is a standard form contract?

“Standard form contract” is not defined at law but we can think of it in general terms as a contract that has been prepared by one party where the other party had little or no opportunity to negotiate the terms. It is often said to be offered on a ‘take it or leave it’ basis. Note that if a party alleges that a contract is a standard form contract, the contract is presumed to be so unless proven otherwise.

There are certain standard form contracts which are not covered. These include, for example, contracts related to shipping and car insurance.

Are you, or are you contracting with, a small business?

The statutes effectively define “small business” as a business that employs less than 20 people. This includes casual employees employed on a regular and systematic basis, at the time the contract is entered into.

What is an unfair term?

A term of a contract is unfair if:

  • it would cause a significant imbalance in the parties;
  • 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.

The provisions list numerous examples of the kinds of terms in a contract that may be unfair. Examples include:

  • a one-sided right to termination;
  • an ability of one party to penalise the other for breach or termination, but not the other way round; and
  • a one-sided right to assign the contract.

In determining whether a term is unfair, a court must also consider the extent to which the term is transparent, as well as the contract as a whole.

Not all unfair terms are void

There are some excluded terms outlined in the provisions. So even if terms on these topics are unfair, they are not void. These are terms that define the main subject matter of the contract, and terms that set the upfront price payable.

Key takeaways

  • If you are a small business and you think there is an unfair term contained in a contract, you can apply to the court for such a finding. You could also be able to request that the relevant regulator (being the ACCC or ASIC) applies on your behalf
  • If you contract with small businesses, review your standard form small business contracts and remove any terms that could be considered unfair to ensure compliance with these amendments

[1] Schedule 2 of the Competition and Consumer Act 2010 (Cth).

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