Insights / February 15th, 2016

How unfair contract terms will affect your business

What are the changes?

Protection from unfair contracts that was once only available to consumers will now be offered to small businesses under the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (the Bill) which was passed by Senate on 12 November 2015. The new laws will impact upon all contracts where:

  • the contract is in standard form;
  • one party to the contract is a small business (see below); and
  • the upfront price payable under the contract does not exceed $300,000 (for contracts with a duration of a year or less) or $1,000,000 if the contract duration is more than a year.

The legislation provides small businesses with greater protection and means all parties will need to be more careful in considering their obligations when drafting contract terms. The transitional period in which businesses can prepare for the changes is 12 months, so the amendments will come into effect in November 2016.

How will this affect your business?

The new legislation will apply to your contract if the contract meets the ‘small business contract’ test. This means that:

  • at the time the contract was entered into, at least one party is a business which employs less than 20 people. This is to be calculated using a head count approach, including all people employed by the business on a full time, part time and regular basis; and
  • the value of the contract does not exceed the thresholds which are set out above.

If these criteria are met, a contract will be considered as a ‘small business contract’ regardless of whether the small business is the supplier or acquirer of the relevant goods or services.

In the same way as consumer contracts, a small business contract term is considered unfair if:

  • it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
  • 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.

While the Bill does not apply to contracts between businesses that pre-date the legislation coming into force, any contract that is renewed or renegotiated after commencement will be affected. Any unfair terms in low-value contracts can be declared void by a court, and it will be unlawful to seek to enforce such a term once declared void. The contract will continue to bind the parties if it can operate without the unfair term. However, it is important to note that the term will be void and unenforceable in all that business’s other contracts with small businesses; not just the customer who disputed the term.

What will you need to amend in your contracts?

Existing contracts should be reviewed and amended prior to renewal to ensure that any terms which could be considered unfair are altered. Strategies should also be implemented to ensure that small business customers can be easily identified so that suitable contracts can be amended to comply with the requirements under the Bill. Larger customers should also be acknowledged so that stronger terms can be retained for these businesses who do not require protection as stipulated in the Bill.

Cowell Clarke has extensive experience reviewing, amending and drafting contracts. If you think your contract may be unfair to small businesses and require assistance in amending your terms to be compliant with the Bill, please contact us.

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