What you need to know
A new law will deem unfair clauses in standard form contracts as void and unenforceable.
It applies to contracts that are signed, varied or renewed after 12 November 2016.
Who does it effect?
Any business that enters standard form contracts with small businesses in Australia. A small business is one that has 20 or less employees.
What is a standard form contract?
These are contracts that are not negotiated, they are typically provided on a take or leave it basis. The contract must also be:
- for the sale of goods or services or the sale or grant of interest in land;
- with a small business; and
- for an upfront price of no more than $300,000, or $1 million if the term of the contract is for more than 12 months (but not including any interest, fees or charges that may be incurred).
Contracts for shipping, car insurance, mortgages and company constitutions are not covered by this law.
What is unfair?
An unfair clause is one that:
A. Causes a significant imbalance with the rights and obligations of the parties;
B. Is not reasonably necessary to protect the legitimate business interests of the party benefiting from the clause; and
C. Would cause financial or other detriment to the small business.
The courts will also look at the whole contract and take into consideration whether the clause was hidden in the fine print and phrased in complex language versus whether it is in plain language and clearly presented and expressed.
Some examples of unfair contract clauses
These are one sided clauses. It includes clauses that:
- Allows one party to terminate the contract but not the other.
- Penalises one party for a breach but not the other.
- Allows one party to vary the terms of the contract but not the other.
- Allows one party to determine whether a breach has occurred but not the other.
What is fair?
Some clauses are deemed “fair” under this new law. This includes clauses that:
- Define the main subject of the contract;
- Set the upfront price that is payable; or
- Are required by state or federal law.
Who is the ACCC targeting?
The ACCC will be focussing on:
- Small business services
- Retail leasingA
- Independent contractors
You should consider being particularly proactive in complying with the unfair contract terms law if you are involved in these areas. No doubt the ACCC will be looking to catch you and as many businesses as possible (and trying to get plenty of publicity for it). Don’t get caught, comply.
What you need to do
Decide whether your contracts need to comply with the unfair contract terms law. Review your standard form contract and any other document that is incorporated or becomes part of the contract. This can have broad implications. It is common for contracts to refer to documents outside the contract.
For example, a franchise agreement may say that the franchisee must comply with the franchisors operations manual, policies and guidelines as amended from time to time. The contents of all these additional documents need to be fair.
[….and bonus points to those who think it is potentially unfair for the franchisor to be able to unilaterally change these documents!]
Obviously, if you are too busy or unsure, get legal advice as soon as possible.
What you need to do if you are a small business and don’t have standard form contracts?
Rejoice and maybe breathe a little easier. From now on, you will benefit from the protections the unfair contract terms law provides.
But don’t turn your brain off or put your guard down.
Always, always read and understand any contract before you sign it or go ahead with it. It is still possible for businesses to include valid and harsh clauses in their contracts. You may think that they are unfair, but the law may not.
Need more information
Check out the ACCC’s website available here.
Or, get in contact with us.