Proposed New Small Business Unfair Contract Laws

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Significant changes to contract laws affecting businesses are due to commence early next year. All small businesses and those who contract with small businesses will be affected by these changes.

Some laws that have historically been in place to protect consumers from what could be perceived to be an unfair standard form contract, will now extend to protect small businesses.

The Court will have the power to declare unfair terms as void. However, the remainder of the contract will continue to bind the affected parties to the extent that the contract is capable of operating without the unfair term.

The proposed changes will be rolled out through forthcoming amendments to the Australian Securities and Investments Commission Act 2001 and the Competition and Consumer Act 2010.

Definition of Small Business Contract

At the time the contract was entered into:

  1. At least one of the parties employs fewer than 20 people; and

(Note, number of employees is calculated on a per person basis. Therefore each full time, part time and casual employee constitutes one person. However, only casual employees that are employed on a regular and systematic basis, not seasonal, are counted.)

  1. The contract value (upfront price payable) does not exceed $100,000 or if it is a contract for more than one year it does not exceed $250,000. For credit contracts, the interest payable is excluded in determining the contract’s value.

Importantly, it is irrelevant if the small business is the acquirer or supplier of the goods and/or services.

What is a Standard Form Contract?

A contract is presumed to be a standard form contract, unless a party to the proceedings alleges and proves otherwise. In determining whether a contract is a standard form contract, a Court is required to consider the following:

  1. Whether one of the parties has all or most of the bargaining power relating to the transaction (e.g. the contract is presented as “take it or leave it”);
  1. Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  1. Whether another party was required either to accept or reject the terms of the contract in the form in which they were presented;
  1. Whether another party was given an effective opportunity to negotiate the terms of the contract; and
  1. Whether the terms of the contract take into account the specific characteristics of another party of the particular transaction.

Defining an Unfair Contract Term

All three of the following must be proven, (on the balance of probabilities), for the Court to determine that a term is unfair:

  1. The term causes a significant imbalance in the parties’ rights and obligations under the contract; and
  1. The term would cause detriment (financial or otherwise) to a party if it were to be relied upon; and
  1. It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term (e.g. actual costs and mitigation of risk).

The following terms cannot be declared to be unfair:

  1. A term that defines the contract’s main subject matter; or
  1. A term that sets out the upfront price of a contract; or
  1. A term that is expressly permitted by law.

The Court is also required to consider:

  1. The extent to which the contract is transparent (e.g. reasonable plain language, legible, presented clearly, readily available to the affected party); and
  1. The contract as a whole.

Examples of Unfair Terms

Section 25 of Schedule 2 of the Act provides statutory examples of unfair contract terms.

Unfair terms will include a term that permits, or has the effect of permitting, one party (but not another party) to:

  1. Avoid or limit performance of the contract;
  1. Terminate the contract;
  1. Vary the terms of the contract;
  1. Renew or not renew the contract;
  1. Vary the upfront price payable under the contract without the right of another party to terminate the contract;

Unfair terms will include a term that permits, or has the effect of permitting one party to:

  1. Unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
  1. Unilaterally determine whether the contract has been breached or to interpret its meaning;
  1. Assign the contract to the detriment of another party without that other party’s consent;

Unfair terms will also include a term that limits, or has the effect of limiting:

  1. One party’s vicarious liability for its agents;
  1. One party’s right to sue another party;
  1. The evidence one party can adduce in proceedings relating to the contract;

Finally, unfair terms will also include a term that:

  1. Imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract.

Exemptions

Contracts that will be exempt include those that are governed by particular industry specific legislation or regulations that exempt the Act. The main area of exemption relates to contracts subject to maritime law.

Remedies

The Court may provide the following remedies to aggrieved parties:

  1. Order that the term is void, varied or otherwise;
  1. Grant an injunction;
  1. Make compensation orders; and/or
  1. Provide a pecuniary penalty (maximum penalty for corporations is $1.1 million).

In addition, once a term is declared to be unfair, the aggrieved party has the right to commence separate civil action seeking an award of damages.

Conclusion

We will keep providing updates as to when these new laws will come into operation. All standard form contracts that your business uses will need to be reviewed to take into account these new proposed laws.

If you would like further information or advice in regard to your business contracts, please contact Tim Osborn.

 

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