Unfair Contract Terms for Small Businesses
New Legislation Affecting Small Business Contracts
In 2015 the Australian Competition and Consumer Commission (ACCC) prioritised enforcing the Unfair Contract Terms Law for consumer protection. Since our last update, new legislation has passed to extend the Unfair Contract Terms Law to small business contracts.
Effective 12 November 2016, the new law will apply to contracts entered into or renewed on and after this date.
Unsure about how this new legislation could affect you? We’ve outlined key information that you need:
Who Is Impacted?
As this law is for the protection of small businesses, entities, including large corporations, should review the standard form contracts that they have entered into with small businesses to ensure their compliance.
“Small Business Contracts”
A small business is defined as one employing less than 20 people.
Applicable contracts are standard form contracts outlining:
Upfront payments payable valued no more than $300,000; or
If the contract is for more than 12 months, upfront payments are valued at less than $1 million.
This signals a change from the previous Unfair Contract Terms law for consumer protection, where the threshold for upfront payments was $100,000 and $250,000 if the contract lasts for more than 12 months.
A standard form contract is when one party presents a standard, non-negotiated contract to the other party. Although standard-form contracts are not explicitly defined within the law, contracts alleged by a party to contain an unfair term will be presumed to be standard-form contracts.
“Unfair Terms”
Cause a significant imbalance in the parties rights and obligations
Not reasonably necessary to protect the legitimate interests of the party advantaged by the term, and
Cause financial or other detriment (such as delay) to a small business if it were relied on.
In determining an unfair term, the following will also be considered:
The transparency of the term: Whether the term is presented clearly, expressed in reasonably plain language, and available to the affected party.
The contract as a whole: Whether the rest of the contract provides additional benefits, costs, or context in relation to the term in question.
Examples
As provided by the ASIC, examples of possible unfair terms include:
Terms where a small business is liable to pay large default fees that exceed the amount needed to protect the legitimate interests of the other party.
Terms that outline an automatic renewal of a contract once a term has ended, but early termination fees apply for the small business to exit the new contract.
Terms where one party is allowed to increase interest or fees, but the small business does not have the right to exit the contract without consequences (e.g. termination fee).
Check out ACCC for Determining Whether a Term is Unfair.
Also, check out ASIC for Unfair Contract Term Protections for Small Businesses.
What Happens When a Contract Term is Deemed Unfair?
The term will be considered void, although the rest of the contract will, in most cases, continue to apply.
How Will the Law Be Enforced?
Only a court and tribunal can determine if a term is unfair.
As a transitionary measure, in the last twelve months, the ACCC has sought voluntary compliance with the new contract terms law from businesses that offer services in franchising, retail leasing, advertising, telecommunications, and independent contracting.
What Should I Do Next?
Reiterating our previous advice, we recommend that you review your standard form contracts with small businesses to ensure compliance with the new legislation, paying attention to:
Clarifying contract terms that might be considered vague, opaque or not written in clear language.
Narrowing down broadly-expressed terms.
Review payment considerations that fall under your contract, including payment schedules and the upfront price payable.
Contact us for any legal advice related to unfair contract terms. Our lawyers at You Legal will be happy to assist you in any way we can.
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* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.