Reminder: Unfair Contract Terms Amendments have come into force

On 12 November 2016, a new law[1] to protect small businesses from unfair terms in business to business standard form contracts took effect.

The law applies to:

  • any new or renewed contract entered into on or after 12 November 2016.
  • any existing contract if it was varied on 12 November 2016 or after that date.

What this means is that if a particular term in a standard form contract to which a small business is a party is found to be unfair by a court or tribunal, then that clause will be void and the small business will no longer be required to comply with it. The balance of the contract will continue to bind the parties to the extent that it is capable.

Do these changes concern me?

The changes have the potential to apply to a wide range of contracts involving small businesses. Specifically the changes will impact all “standard form contracts” where:

  • one party to the contract is a small business (being a business which employs less than 20 people).
  • the upfront price payable under the contract is not greater than $300,000.00 (or $1 million if the contract has a duration of more than 12 months).

What’s a standard form contract?

This term is not defined in the new laws. When determining whether a given contract is a ‘standard form’ contract, a variety of factors are to be taken into account including:

  • whether one of the parties has all or most of the bargaining power.
  • whether one of the parties was required to accept or reject the contract on a “take it or leave it” basis.
  • whether one party was given a proper opportunity to negotiate the terms of the contract.
  • how specific the contract is to the job at hand.

 

When will a contract term be considered to be “unfair”?

Terms will be considered for unfairness on a “case by base” basis. The changes won’t assist those who have simply made a “bad bargain” - the changes will not apply to terms which set the upfront price payable under the contract.

However, a term will be considered to be “unfair” where:

  • the inclusion of the term would cause a significant imbalance in the parties’ rights and obligations under the contract.
  • the term is not reasonably necessary in order to protect the legitimate interests of the party who will benefit from the inclusion of the term.
  • the inclusion of the term would cause detriment to the other party.

The kinds of terms which may be considered to be unfair include unilateral rights to vary the contract, unilateral rights to terminate, rights to vary the characteristics or the goods or services to be supplied, unilateral rights to determine the meaning and interpretation of the contract, unilateral rights to assign a contract, clauses which have the effect of penalizing a party for breach and limitations of liability in favour of one party.

What happens next?

The ACCC has indicated that the small business unfair contract terms law will be a priority for it in the coming year and that it may provide assistance to small businesses who believe they are subject to an “unfair term”.

Further, it will be open to individual businesses or parties to take their own court action or go to a tribunal where they consider a term to be unfair.  Disputes regarding the fairness of a particular term may also be resolved through alternative dispute resolution schemes or industry ombudsmen.

Lavan comment

If you require assistance in understanding whether the new laws apply to your business or in reviewing your standard form contracts to identify whether they include clauses likely to be captured by the new laws and / or to amend those contracts, please contact Iain Freeman.