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Unfair Contract Law Soon to Protect Small Businesses

The law that protects consumers from unfair contract terms will be extended to cover small businesses from 12 November 2016.

The Australian Competition and Consumer Commission (ACCC) and the Australian Securities Investment Commission (ASIC) delivered a webinar last week which discussed the changes for small businesses.

Although the unfair contract law is regulated by ACCC and ASIC, they do not have the power to determine if a contract is unfair and so ultimately the decision is one for the court.

What is an unfair contract term?

Although the court will look at the transparency of the contract as a whole before deeming a term unfair and effectively void* from the rest of the contract, generally an unfair term is one that:

  1. causes a significant imbalance
  2. is not reasonably necessary to protect the business’ interests
  3. it causes detriment to the small business

There are 8 terms which the ACCC and ASIC consider to be unfair:

  1. The right to unilaterally vary the contract
  2. Early termination fees
  3. Limited or no liability
  4. Automatic rollover
  5. Right to terminate Agreement with no cause
  6. Liquidated damages
  7. Wide indemnities
  8. Forfeiture clauses

However whether a term is actually held unfair will depend on the context of the contract as a whole.  For example a liquidated damages clause may not be considered an unfair term if it can be shown that it fairly and accurately reflects the cost of the breach leading to termination. You can view some examples of these terms here.

When does the unfair contract terms law apply to small businesses?

The unfair contract law will apply to small businesses if:

  1. the contract is a standard form contract – i.e. where no genuine negotiations take place in relation to the contract;
  2. where one of the parties to the contract has less than 20 employees – this is taken as a general headcount and so can include casual employees if they are engaged on a regular basis; and
  3. the upfront price** in the contract is less than $300,000 for one year or less than $1,000,000 for multi-year contracts.

Exclusions

The following are not covered by the unfair contract terms law:

  • A term relating to the price
  • Contracts entered into before 12 November 2016 (unless renewed or varied on or after this date)
  • Shipping contracts
  • Constitutions of companies, managed investment schemes or other kinds of bodies
  • Certain insurance contracts (e.g. car insurance)
  • Terms required by the Franchising Code of Conduct

What to do before 12 November 2016?

All small businesses should consider reviewing all of its standard contracts to check there are no unfair terms and consider any renewal dates which may bring them within this new law.

If you do think a contract term is unfair you should seek legal advice.

*This doesn’t mean the entire contract is deemed void, but rather only the specific term which is held to be unfair.

** “Upfront price” is that which is disclosed at the time the contract is entered into. Other payments that you may be entitled to under the contract but which cannot be calculated (e.g. royalties) because they are contingent on other elements (e.g. number of sales) are not considered an “upfront price” as it’s not quantifiable.


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