Reminder: Small businesses are now protected against unfair contract terms

In case you missed the announcement on the 12th of November 2016, the Unfair Contract Terms provisions of the Australian Consumer Law (ACL) were extended to cover small business. In effect, the Court may now void a term of a small business contract (which is a standard form contract) if it is found that such term is unfair to one of the parties.

It is important to note that it is only the unfair term that will be voided; the rest of the contract will remain in force unless the contract cannot continue to operate without the voided term.

So, what does this mean for you? Whether you are a small business (as defined below) or a big business, it is important to understand how this extension will affect your rights and obligations under contract and how it may impact any existing contracts you have. To help you, we have broken down the legislation changes for you below.
What is a small business?

For the purposes of the ACL, a small business is one, which, at the time the contract is entered into, employs fewer than 20 persons. This is determined on a simple headcount basis; however casual employees can only be counted if they work on a regular and systematic basis.

What is a small business contract?

A contract is a small business contract if:

  1. the contract is for the supply of goods or services, or a sale or grant of an interest in land; and
  2. at the time the contract is entered into, at least one party to the contract is a small business; and
  3. either of the following applies:
    1. the upfront price payable under the contract does not exceed $300,000;
    2. the contract has a duration of more than 12 months, and the upfront price payable under the contract does not exceed $1,000,000.

For the purposes of the unfair contract terms provisions, the small business contract also needs to be a standard form contract. The term ‘standard form contract’ is not specifically defined in the legislation, however, the following considerations are taken into account when determining whether a contract is standard form:

  1. The bargaining power of the parties;
  2. The contract is prepared by one party without prior discussion about the transaction with the other party;
  3. The contract is offered on a take it or leave it basis;
  4. The existence of the opportunity to negotiate the terms of the contract; and
  5. The considerations given to the other party or the particular transaction.

It is also important to note that consumer contracts related to certain shipping contracts, constitutions and insurance contracts are not covered by the legislation.

What is an unfair contract term?

In determining whether a term of a small business contract is unfair, the Court looks at the following considerations:

  1. the term would cause a significant imbalance in the parties’ rights and obligations under the contract; and
  2. the term is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
  3. the term would cause detriment to a party.

An example of the terms which typically fall into this category are terms which enable one party, but not the other party to:

  1. vary the price payable under the contract without the right of the other party to terminate the contract;
  2. avoid or limit its obligations under the contract;
  3. vary the terms of the contract;
  4. renew or not renew the contract;
  5. terminate the contract; and
  6. impose a penalty on the other party for breaching or terminating the contract.

What does this mean for you?

Keeping in mind that standard form contracts are typically drafted in a manner that is more advantageous to the drafting party, it is likely that any existing template contracts that you utilise in your business may contain terms that are considered to be unfair contract terms. Accordingly, if you are contracting with a small business, it is important to consider the above matters prior to entering into the contract.

It is not always a simple exercise to determine whether a particular term would fall into the ‘unfair’ category. To ensure you are protected we would be happy to review your contracts and provide advice on the enforceability of the terms.

NB Lawyers, the lawyers for employers, offer a consultation to discuss how they can assist you with your contractual requirements.

Written by
Jonathan Mamaril,
Principal & Director, NB Lawyers – the Lawyers for Employers
[email protected]
07 3876 5111