Small businesses cop it from a lot of sides. But there’s some good news for small businesses this month (November 2016) with a new law to protect small businesses from unfair terms in standard form contracts.
The law will help stop big businesses from pushing risk on to small businesses – something that is happening with increasing frequency in the general business and construction sectors. Small businesses are often subjected to standard form contracts by larger businesses. The other party has prepared the contract and it is presented on a ‘take it or leave it’ basis with little or no opportunity to negotiate terms.
The law sets out examples of terms that may be unfair, including terms that enable only one party to:
- Avoid or limit their obligations under the contract
- Terminate the contract
- Invoke penalties for breaching or terminating the contract
- Vary the terms of the contract
The new law will apply to a standard form contract entered into or renewed on or after November 12, 2016. If a contract is varied the law will apply to the varied terms.
The contract has to be for the supply of goods or services or the sale or grant of an interest in land. Most standard form contracts will be covered by the law but it doesn’t apply to the following: shipping contracts; constitutions of companies, managed investment schemes or other kinds of bodies; and car insurance. Terms that set the upfront price payable under the contract are not covered by the law. At least one of the parties has to employ less than 20 people, including casuals employed on a regular basis. It doesn’t apply if the upfront price payable is worth more than $300 000 or $1 million if the contract is for more than 12 months.
A court or tribunal still has to decide whether a term is unfair. If a term is found to be ‘unfair’ it will be void and not binding. The rest of the contract will continue to bind the parties where it is capable of operating without the unfair term.
For a court to determine a term is unfair it has to find that the term:
- Caused a significant imbalance in the parties’ rights and obligations
- Is not reasonably necessary to protect the legitimate interests of the party advantaged by the term
- Would cause detriment (whether financial or otherwise) to one party
This is a three-limbed test and the court will need to find that all three limbs exist. The court will also consider the extent to which the term is transparent and the contract as a whole.
The new law is part of the Australian Consumer Law (ACL). The ACL came into force on 1 January 2011. It replaced the Trade Practices Act 1974 and previous Commonwealth, state and territory consumer protection legislation.
It is vitally important that you read and understand any contract you sign, even if it is presented to you as a “standard contract”. If you are presented with a standard form contract and think it is unfair you can ask the other party to remove or amend it. Having a lawyer review the contract can help you determine if there are unfair terms. You can also get assistance from the Australian Competition and Consumer Commission (ACCC) or your state based consumer protection agency.