The Fair is Coming to Town – Unfair Contract Terms and Small Businesses

From 12 November 2016, small businesses will be protected from unfair terms in standard form “take it or leave it” contracts.  The unfair contract terms law will apply to standard form contracts entered into after 12 November 2016, provided:

  1. the contract is for the supply of goods or services, or the sale or grant of an interest in land;
  2. at least one of the parties to the contract is a small business, i.e. less than 20 employees (including casual employees employed on a regular and systematic basis); and
  3. the upfront price payable (i.e. payments provided for the supply, sale or grant under the contract that are disclosed at or before the time the contract is entered into) under the contract is not more than $300,000.00, or $1 million if the contract is for more than 12 months.

Contracts entered into prior to 12 November 2016 are excluded from the unfair contract terms law.

If a contract is varied on or after 12 November 2016, the protections will apply to that term but not to the rest of the contract.  A contract which is “assigned” on or after 12 November 2016 will not be subject to the new law, unless the incoming party enters into a new contract.

What is a “standard form contract”?

In broad terms, a standard form contract is one which has been prepared by one party to the contract and is not typically subject to negotiation – “take it or leave it”.  In determining whether a contract is a standard form contract, a court would take into account:

  1. whether one of the parties has most of or all of the bargaining power in the transaction;
  2. whether the contract was prepared by one party prior to any discussions between the parties regarding the transaction;
  3. whether the other party to the transaction was required to either accept or reject the terms of the contract in the form in which it was presented;
  4. whether the other party was given an opportunity to negotiate the terms of the contract, and
  5. whether the terms of the contract take into account any specific characteristics of the other party to the contract.

Standard form contracts are typically used for the supply of goods and services. Examples include supply agreements, distribution agreements and trade contracts.

What is an “unfair term”?

A term is an “unfair term” if it:

  1. would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  2. is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term, and
  3. would cause detriment, whether financial or otherwise, to a party if it were to be applied or relied on.

Only a court or tribunal can determine whether a term is unfair under the new legislation. If a term is deemed to be “unfair”, the term will be void and non-binding upon the parties.  The contract will continue to bind the parties to the extent that the contract is capable of operating without that “unfair” term.

There are however, a number of terms that are excluded from the unfair contract terms law.  These include terms that:

  1. define the main subject matter of the contract;
  2. set the upfront price payable, and
  3. are required or expressly permitted by a law of the Commonwealth, or a State or Territory.

What is the upfront price payable?

The upfront price payable is the total amount payable under the contract which is disclosed at or before the time the contract is entered into.

Some portions of the upfront price payable cannot be calculated, i.e. the percentage of an unknown amount such as the commission on the sale of a property.  In this case, the term in the contract which includes the contingent payment is unlikely to be subject to the unfair contract terms law, provided the contingent payment was disclosed at or prior to the contract being entered into.

Any additional fees such as fees if a party exits the contract prior to completion, will not be included as part of the upfront price payable, neither will any interest payable.

How can businesses prepare for the new law?

The use of standard form contracts is a commercial reality for large companies that don’t have the time or resources to negotiate terms and conditions with hundreds or thousands of customers.  That being said, compliance with the increased scope of the unfair contract terms law will have to be carefully considered by companies who use standard form contracts.

Suggested ways to avoid breaching the unfair contract terms law include:

  1. requiring an express acknowledgement and signature from the customer confirming that the customer has had the opportunity to discuss and negotiate the terms of the contract (and actually complying with such a clause);
  2. inserting a section in the standard form contract for the customer to list any clauses of the contract that it would like to negotiate, i.e. a Special Conditions clause;
  3. adding an express note for the attention of the customer advising that the standard form contract comprises proposed terms that can be negotiated; and
  4. as part of the standard form contract, requiring a customer to disclose the number of its employees to assess the extent to which the unfair contract terms law will apply.

If a party to a contract is a small business, your contract will be affected by the new unfair contract terms law. All businesses should review standard term contracts to consider whether there are any terms that could be declared void for being “unfair”. Businesses now have less than a month to review and update contracts currently in use to avoid non-compliance.