Update to unfair contract terms in small business contracts

New laws will apply to protect small businesses from unfair contract terms in standard form contracts entered into or renewed on or after 12 November 2016. The laws will apply where:

• the contract is for the supply of goods or services or the sale or grant of an interest in land; and
• at the time the contract is entered into, at least one of the parties to the contract is a small business; and
• the upfront price payable under the contract is no more than $300,000 OR $1 million if the contract is for more than 12 months.

What is small business?

A small business is a business that employs less than 20 people (including casual employees if the casual employee is employed on a regular and systematic basis).

What is a standard form contract?

Although not defined by the new laws, a standard form contract is typically one that has been prepared by a party to the contract that is not subject to negotiation between that party and the other party to the contract. Such contracts are offered on an ‘as-is’ basis. Standard form contracts are most commonly used for the supply of goods and services.

What are unfair contract terms?

Examples of terms that may be unfair include the following:

• terms that enable one party but not another to avoid/limit their obligations under the contract
• terms that enable one party but not another to terminate the contract
• terms that enable one party but not another to vary terms of the contract
• terms that penalise one party but not another from breaching/terminating the contract

Who decides that a contract term is unfair?

Only a court of tribunal can ultimately decide that a term is unfair.

What is the test for “unfairness”?

The test for unfairness involves three limbs, and states that a term of a contract is unfair if:

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

What happens when a contract term is deemed unfair?

If a court or tribunal finds that a term is unfair, that term will be void and therefore not binding on the parties. The rest of the contract will continue to bind the parties to the extent that the contract is capable of operating without the unfair term(s).

Are any contracts or terms not covered by the unfair contract terms law?

Excluded contracts:

• Contracts entered into before 12 November 2016 (unless the entire contract is renewed on/after this date OR a term of the contract is varied on/after this date [the laws apply to the varied term])
• Shipping contracts
• Constitutions of companies, managed investment schemes or other kinds of bodies
• Certain insurance contracts (e.g. car insurance)

Excluded terms:

• Terms that define the main subject matter of the contract
• Terms that set the upfront price payable
• Terms that are required or expressly permitted by a law of the Commonwealth, state or territory (e.g. permitted under the Franchising Code or another prescribed industry code)