Home » Unfair contracts regime – what you need to know, what you need to do

Unfair contracts regime – what you need to know, what you need to do

Posted by Marcus McCarthy | 10 November 2016 | Corporate & Commercial

From 12 November 2016, the new unfair contract regime under the Australian Consumer Law will be in effect across Australia. The changes expand the laws around consumer protection to include small businesses, and will effect the vast majority of standard form contracts entered into between businesses throughout the country.

What are the changes?

The law relates to small business contracts and standard form contract. A “standard form contract” is one which prepared by one party and presented to the other for acceptance with little or no opportunity for negotiation. This is generally where one party has all or most of the bargaining power in the transaction, and where the terms are essentially offered on a ‘take it or leave it’ basis.

Who does it affect?

The changes amend the Australian Securities and Investments Commission Act 2001 (Cth) and the Australian Consumer Law under the Competition and Consumer Act 2010 (Cth), and apply to “small business contracts”. Small business contracts are contracts where:

  • At least one of the parties is an employer of 20 people of less (excluding casual workers); and
  • The contract is for an upfront fee of no more than $300,000.00, or up to $1 million where the contract term is for more than 12 months.

Parties under small business contracts have the opportunity to negotiate unfair terms with the other party and, if necessary, the court will be empowered (on application by either party or by ASIC) to order that an unfair term be removed from the contract without voiding the contract as a whole. This means that the party to a contract may lose the benefit of an important or crucial term if it is not properly drafted or the other party does not have reasonable opportunity to negotiate.

What to look for in a contract

Whether or not a small business contract will be viewed as having an unfair term is based on a number of factors:

  • Is the term reasonably necessary to protect the interests of the party benefiting from the unfair term?
  • Does the term cause financial or other detriment to one of the parties if relied on?
  • Is there a significant imbalance of power between the parties to the contract as a result of the term?

Terms that will likely attract attention under the changes may include clauses that:

  • Improperly allocate risk to one party, particularly when that party cannot control the risk;
  •  Does the contract automatically renew or have a significant fee when a party decides not to renew;
  •  Provide for one-sided termination events or limited ability to redress contractual defaults;
  • Allow unilateral variation of contract conditions.

What should you do?

It is vital that businesses review and where necessary update any relevant standard form contracts to comply with the legislation, develop procedures to ensure that other parties are given sufficient opportunity or scope to negotiate the terms.

If you have any questions in relation to the new unfair contract regime or how it effects your business, contact us on +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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