Media

28 February 2017

Does the Small Business and Unfair Contract Terms legislation extend to leases, bank loans and franchises?

 If a contract falls into the category of a “standard form contract” and involves one or more “small businesses” it will be subject to the unfair terms legislation regardless of whether it is for example, a lease, bank loan, or franchise agreement. There are some types of contracts that are exempt because they are regulated under different legislation such as insurance contracts and consumer credit contracts.

Does it mean we will have to amend our currently existing contracts now to avoid breaching the legislation?

If you use “standard form contracts” that is, contracts that are provided on a ‘take it, or leave it’ basis with little or no room for negotiation and you deal with "small businesses" (businesses with less than 20 employees) and the total consideration payable under the contract (if less than a year ) is less than $300k (if more than 1 year) or less than $1 million then your contracts will be subject to the regime.

If your contract contains unfair terms then you can either amend it to remove or modify the unfair terms or allow for reasonable negotiation with the other party on a case by case basis so that the contract falls outside the definition of a standard form contract. If you do nothing you risk the unfair terms being declared invalid by the courts.

How do you make a claim that a term is unfair?

 If you think a term in your contract is unfair, the first thing to do is to try and negotiate with the other side. If a resolution cannot be found then you may need to seek legal advice as to whether the term is or may be considered unfair under the legislation and have your lawyer try and negotiate on your behalf.

A complaint can be lodged with the ACCC but they do not act on behalf of individuals or businesses unless there are a large number making the same or similar complaints in which case may initiate a class action.

A court has the only authority to determine if a contract term is unfair and so you may need to take legal action if the matter cannot otherwise be resolved.

What if my idea of unfair is different to your idea of unfair?

 There are three tests to apply: 1- the term causes significant imbalance in the parties’ rights and obligations under the contract. 2- the term is not reasonably necessary to protect a legitimate business interest of the party advantaged by it 3- the term would cause detriment to a party if it were relied on. There are other circumstances that a court must take into consideration including (among others) the extent to which the term is transparent and the contract as a whole. If the parties still cannot agree applying these tests then legal advice may need to be sought.

What if you have agreed that a term is not unfair before signing the contract – can you then claim later it is unfair? 

The tests outlined above would apply. It would also depend on the disadvantaged party’s ability to have negotiated the terms of the contract before signing. If there were substantial negotiations then it is likely the contract would fall outside the scope of a standard form contract. 

What are some examples of unfair terms?

• A term that permits one party but not the other to terminate the contract.
• A term that permits one party to vary the price without the right of the other to terminate.
• A term that allows one party to vary the goods or services to be supplied.

Has there been any examples of this being applied to small business yet?

 Not that I’m aware of.

Can a term be unfair if it is in a non-standard form contract – how do you make the contract non-standard form? For example do you have to videotape negotiations?

 For a contract to be a non-standard form whether the party who did not prepare the contract has a reasonable ability to negotiate its terms will be considered. If this were in dispute before a court, evidence such as email correspondence, draft terms and file notes on negotiations may be considered.

How do you know whether you are dealing with a small business? Do you have to ask the number of employees?

 Yes, if you suspect you are dealing with a small business and you intend to use a standard form contract you will need to ascertain whether the business has less than 20 employees (including casual employees employed on a regular and systematic basis). You should seek confirmation from the business owner in writing as to how many employees it has.

Do the provisions apply when you are dealing with 2 small businesses contracting with each other? 

Yes they will apply even where both parties are small businesses.

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