Home » New unfair contract terms law applies to small business

New unfair contract terms law applies to small business

Posted by Marcus McCarthy | 09 December 2016 | Corporate & Commercial

The new unfair contract terms regime in the Australian Consumer Law and the ASIC Act will apply to the standard form contracts with small business. Previously, the regime only applied to contracts between businesses and individuals. Business with no prior exposure will now need to consider the implications.

The ACCC has identified the following industries as being the subject of its initial compliance activities – franchising, retail leasing, advertising services, telecommunication services and independent contracting (e.g IT consultants and architects).

1.      Applies from 12 November 2016

The new rules will apply to contracts entered or renewed on or after 12 November 2016, or varied on or after 12 November 2016 (but only to the varied terms).

2.      Will the new rules apply to your contract?

Is :

  • Your contract a standard form?  Standard form contracts are generally not negotiated (one size fits all; ‘take it or leave it’ contract), or if the terms that were negotiated were the main subject matter of the contract or the upfront price.
  •  Other party is a small business? At least one party has fewer than 20 persons, determined at the time the contract was entered into on a headcount basis. Large corporate groups may be captured if the contract is entered into by a subsidiary with fewer than 20 employees. You can not rely on information given by the other party regarding the size of the business (no defence).

Are:

  • Financial thresholds satisfied? Upfront price payable under the contract is $300,000 or less, or $1M or less and the duration is more than 1 year? May include commissions, royalties and interest payable (other than on interest on loans).

3.      What makes a term unfair?

A court can declare unfair terms void and unenforceable and may award compensation if a small business suffers determinate because of the unfair term. 

  • Causes a significant imbalance between the parties
  • Not reasonably necessaryto protect the legitimate interests of the party who would be advantage
  • Causes a significant determinate to a party if it were applied or relied on.

4.      Terms that could be unfair include:

  • Rights to unliterally vary the contract
  • Automatic rollover of contracts
  • Liquidated damages clauses
  • No right to refund of deposit
  • Rights to terminate without cause
  • Limited liability clauses
  • Wide indemnities
  • Excessive default fees in loan agreements.

You get the picture – it’s broad reaching!!

5.      What should you do?

  • Audit the extent of which standard form contracts are used.
  • Identify the remaining term of the contract, including renewal dates.
  • Consult with the business to determinate the commercial imperative for potentially problematic clauses (are they reasonably necessary to protect legitimate business interests)?
  • Amend standard form contracts for redrafting clauses to address any significant imbalances.
  • Train staff on the new rules and incorporate the new rules in your training!

Should you require any further information or assistance, please do not hesitate to contact us +612 9016 0141.

This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.

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