Small businesses can often find themselves at the mercy of one-sided contracts. However, the new unfair contract legislation discussed below is about to change that. The legislation seeks to protect small businesses that have little or no bargaining power when negotiating and entering into a contract.
The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (“the Act”) will become operational on 12 November 2016. The Act extends the unfair contract terms regime to small businesses.
When does the Act apply?
The Act applies to “consumer contracts”. Consumer contracts are contracts that relate to:
- the supply of goods or services; or
- the sale or grant of an interest in land.
“Standard form” consumer contracts are affected by the Act. A standard form contract is a contract that is presented to a party on a “take it or leave it” basis, that is the terms of the contract must be accepted without negotiation.
Finally, for the Act to apply certain prerequisites must be satisfied namely:
- at least one of the parties must employ less than 20 people; and
- the upfront contract price must not exceed $300,000 or, in the event that a contract exceeds a period of 12 months, then the upfront contract price must not exceed $1,000,000.
The upfront contract price is the consideration payable under the contract. If multiple goods and services are to be provided under the contract then the upfront price is the consideration payable for the total supply under the contract. Contingent amounts, that is, amounts that depend on the occurrence or non-occurrence of an event are not included in the calculation of the upfront contract price. Finally, interest payable under the contract is taken into account in calculating the upfront price payable. The exception to this is credit contracts.
When is a term of the contract “unfair”?
A term of a consumer contract is unfair if it:
causes a significant imbalance in the parties rights and obligations under the contract;
is not reasonably required to protect the party who has more “power” or would be advantaged under the contract;
would cause financial or other detriment to a party if it were to be applied or relied on.
Examples of what constitutes an “unfair term” include:
where only one party can avoid or limit performance of the contract;
where only one party has a right to terminate, vary or renew the contract;
where only one party has the right to sue.
In each case the court must determine if the term is unfair after having regard to the contract as a whole. If the court determines that a term is unfair then a declaration is made to this effect and the term itself is void. The balance of the contract remains on foot and in effect. A court cannot order that an offence has been committed nor can it apply a penalty for the inclusion of the unfair term in the contract.
Which contracts are excluded from the operation of the Act?
The following contracts are not captured by the operation of the Act:
contracts entered into before 12 November 2016 (unless they have been renewed on or after this date);
contracts relating to the constitution of companies, managed investment schemes and the like;
certain insurance contracts (such as car insurance); and
contracts in sectors exempted by the Minister (although no sectors are currently exempted.
All businesses should:
review the standard form consumer contracts that they use and identify any unfair terms in contravention of the Act. The contracts should then be duly amended;
if a pre 12 November 2016 contract is varied or renewed businesses should consider whether the contract contains unfair terms that may contravene the Act;
ensure that during contract negotiations parties are given an opportunity to negotiate the terms of the contract and such negotiations should be documented.
Chris Moshidis - Director and Principal
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