Unfair contract terms outlawed when dealing with small business

29 September 2016

On Saturday 12 November 2016, a new law will come into effect. One that prohibits unfair contract terms in standard form contracts when dealing with small business. It will apply to any standard form contract entered into or renewed on or after 12 November 2016:

Some things you should know:
  • The law relates to the supply of goods or services or the sale or grant of an interest in land
  • It applies when at least one party to the contract is legally considered a ‘small business’ (definition below)
  • The ‘upfront price payable’ under the contract must be no more than $300,000 or $1 million if the contract is for longer than 12 months.
  • If a contract is varied after 12 November 2016, the law will apply to the varied terms.
What is a standard form contract?

A standard form contract is a contract prepared by one party where the other party has little or no opportunity to negotiate the terms. These are often drawn up on a ‘take it or leave it’ basis.

Who will decide if a contract is a ‘standard form contract’? The courts.

They will consider:

  • If one of the parties has all or most of the bargaining power in the transaction
  • If the contract was prepared by one party before any discussion occurred between the parties about the transaction
  • Whether the other party was given any real opportunity to negotiate the terms of the contract
  • If the other party was, in effect, required to ‘take it or leave it’
  • Whether the terms of the contract take into account the circumstances of the other party or the particular transaction.
When is a business ‘small’?

A business is legally defined as a small business if it employees fewer than 20 people at the time the contract is entered into. All full time, part time and casuals employed on a regular and systematic basis are counted. Even if a part-time worker only works one hour per week. The count does not include employees of subsidiaries or related entities.

Word to the wise: a practical approach to contracting is that, unless you are contracting with QANTAS or the like, presume you’re dealing with a small business and treat it as such.

What is the ‘upfront price payable’ of the contract?

Here’s where it gets a little complicated. In effect, this is the price payable under the initial order or supply, including all associated fees and charges such as delivery fees. It does not include termination or cancellation fees.

What documents are covered?

Any document mentioned in a contract covered by these laws will generally be subject to the laws. A clear example is where a director’s guarantee forms part of the terms of trade. If this is the case, then the terms of the director’s guarantee must also not be unfair.

When is a term deemed unfair?

Legally speaking, a term is unfair if it:

  • causes a significant imbalance in the parties’ rights and obligations
  • is not reasonably necessary to protect the legitimate interests of the party advantaged by the term, and
  • causes financial or other detriment (for example, a delay) to a small business if it were relied on.

In deciding whether a term is unfair, a court must also consider the term’s transparency.

A term is transparent if it is:
  • expressed in reasonably plain language
  • legible
  • presented clearly
  • readily available to any party affected by the term.

Infamous examples of terms that tend not to be transparent: “Fine print” and “legalese” spring to mind.

What types of terms may be unfair?

Clauses of the following nature are often found in terms of trade, guarantees, leases and other commercial contracts. They are also likely to be unfair.

  • releases from future liability and hold harmless clauses
  • liquidated damages
  • indemnities for legal costs and other recovery expenses
  • unilateral variation of the contract
  • limitation of liability
  • automatic extension/rollover
  • no refund of deposit
  • termination without cause and without paying compensation
What happens if a term is deemed unfair?

Generally, it cannot be enforced. Courts can also order compensation for a small business which suffers loss due to an unfair term.

What should I do with this information?

This law represents a radical change to the way we deal with small business. Our advice is to have your key business contracts and processes reviewed for compliance with the new law before 12 November. Only then can you continue to transact with small businesses with confidence.