If you enter into business agreements with small businesses, you will need to be alert to upcoming changes to unfair contract term protections. In November 2015, the federal government introduced amendments to the Competition and Consumer Act 2010 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth) to extend unfair contract protection laws to small business contracts. The protections currently apply to consumer contracts.
The amendments were subject to a 12-month transition period, which will end on 12 November 2016. The unfair contracts protections will apply to small business contracts entered into, varied or renewed from that date. As a result, certain clauses in standard form contracts are at risk of being unenforceable if a court considers them to be unfair.
Many businesses rely on standard form contracts because it is simpler and more efficient than tailoring a fresh contract to each customer. The changes affect many types of business-to-business standard term contracts, such as business terms and conditions, services agreements, supply agreements and retail leases.
A “standard form contract” has the following features:
· it is prepared before discussions between the parties;
· one party is required to either accept or reject the contract as presented – ie. a “take it or leave it” basis;
· there is no opportunity to negotiate; or
· where the terms are not specific to one party or to the particular transaction.
A “small business contract” is one where:
· at least one party employs fewer than 20 people; and
· the upfront price payable under the contract does not exceed $300,000 (or does not exceed $1 million in the case of contracts for more than 12 months).
A term can be declared unfair if:
· it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
· 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 if it were to be applied or relied on.
Examples of unfair terms include:
· a term that enables one party (but not another) to avoid or limit their obligations under the contract;
· a term that enables one party (but not another) to terminate the contract;
· a term that penalises one party (but not another) for breaching or terminating the contract; or
· a term that enables one party (but not another) to vary the terms of the contract.
If the court determines that the term is unfair, the term will be void. This means it is not binding on the parties. The rest of the contract will continue to apply if it is capable of operating without the unfair term.
Exceptions apply to certain contracts, including shipping contracts, insurance contracts and company constitutions. Furthermore, certain terms are excluded from the definition, including terms that define the main subject matter of the contract, set the upfront price payable or are otherwise expressly permitted by another law, for instance the Franchising Code. Terms might not be unfair if they are clearly drawn to the other party’s attention prior to the agreement (Jetstar Airways Pty Ltd v Free  VSC 539).
All businesses that transact or are likely to come into contact with small businesses should review their standard contract terms and consider if they are fair and reasonable. Terms may need to be redrafted to be made clearer, or potentially controversial clauses be drawn to the other party’s attention at the time of entering into the contract. Affected businesses may even consider using a separate set of contracts for small business customers or drafting an entirely new agreement on a case-by-case basis.