UPDATE: NEW SMALL BUSINESS UNFAIR CONTRACT LAWS – TO COMMENCE 12 NOVEMBER 2016

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Over the past few months we have been advising clients on the new small business unfair contract legislation that will take effect from 12 November 2016.
All small businesses and those who contract with small businesses may be affected by these changes. The small business can be either the supplier or acquirer of goods.
The Court will have the power to declare unfair contract 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 Court will also determine the quantum of compensation with the legislation not containing any scope for pecuniary penalties nor statutory offences.

Definition of Small Business Contract

This definition has been revised from what was originally proposed. The updated definition is:

  1. At least one of the parties employs fewer than 20 people (at the time the contract is entered into);
  2. The contract value (upfront price payable) does not exceed $300,000 or if it is a contract for more than one year it does not exceed $1,000,000;
  3. The contract was entered into, renewed or varied on or after 12 November 2016;
  4. The contract relates to the supply of goods or services or the sale or grant of an interest in land; and
  5. The contract is a “standard form” contract.

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”);
  2. Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  3. Whether another party was required either to accept or reject the terms of the contract in the form in which they were presented;
  4. Whether another party was given an effective opportunity to negotiate the terms of the contract; and
  5. Whether the terms of the contract take into account the specific characteristics of another party of the particular transaction.

Typical examples of standard form contracts include:

  • Franchise agreements;
  • Supply of internet services;
  • Loans to small business;
  • Leases in shopping centres;
  • Standard trading terms and conditions; and
  • Contracts between “big” retailers and “small” suppliers.

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
  2. The term would cause detriment (financial or otherwise) to a party if it were to be relied upon; and
  3. 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:

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

Examples of “unfair terms” include terms where one party (but not the other) can:

  • Avoid or limit the performance of the contract;
  • Terminate the contract;
  • Vary the terms of the contract;
  • Automatically renew or rollover the contract;
  • Vary the upfront price payable under the contract without the right of another party to terminate the contract;
  • Vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
  • Determine whether the contract has been breached or to interpret its meaning;
  • Assign the contract to the detriment of another party without that other party’s consent;
  • Limitations on one party’s vicarious liability for its agents;
  • Limitations on one party’s right to sue another party
If you think a term in your contract is unfair or would like further information and advice in regard to your business contracts please contact Laura Bennett on (02) 4927 2900.

 

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