Unfair contract term protections for small businesses
On 2 February 2016, the Australian Securities and Investments Commission (ASIC) released Information Sheet 211 Unfair contract term protections for small businesses (Information Sheet 211). Information Sheet 211 summarises the Act’s protections for small businesses from unfair contract terms in standard form contracts. In it, ASIC urges businesses to use the transition period to review contracts for terms that would or may breach the new requirements.
From 12 November 2016, a new law will protect small businesses from unfair terms in standard form contracts.
What contracts are covered?
The law will apply to a standard form contract entered into or renewed on or after 12 November 2016, where:
- It is for the supply of goods or services or the sale or grant of an interest in land
- At least one of the parties is a small business (employs less than 20 people, including casual employees employed on a regular and systematic basis)
- 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.
- If a contract is varied on or after 12 November 2016, the law will apply to the varied terms.
A standard form contract is one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms – that is, it is offered on a ‘take it or leave it’ basis.
Terms most at risk
The law sets out examples of terms that may be unfair, including:
- terms that enable one party (but not another) to avoid or limit their obligations under the contract
- terms that enable one party (but not another) to terminate the contract
- terms that penalise one party (but not another) for breaching or terminating the contract
- terms that enable one party (but not another) to vary the terms of the contract.
The terms were considered unfair because they:
- caused a significant imbalance in the parties’ rights and obligations;
- were not reasonably necessary to protect the legitimate interests of the advantaged party; and
- if applied or relied upon, would cause detriment (financial or otherwise) to the other party.
Ultimately, only a court or tribunal can decide that a term is unfair.
Effect of having an unfair contract term
If a court or tribunal finds that a term is ‘unfair’, the term will be void – this means it is not binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.
Contracts and terms that are not covered
While most standard form contracts and contractual terms will be covered by the unfair contract terms law, there are a number of exceptions.
Excluded contracts:
- Contracts entered into before 12 November 2016 (unless renewed 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)
- Contracts in sectors exempted by the Minister – no sectors are currently exempt.
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, or a state or a territory (e.g. permitted under the Franchising Code or another prescribed industry code).
What should your business be doing?
Businesses must therefore ensure that they are compliant with the new unfair contract terms legislation. If you consider that these changes may apply to you, we recommend that you:
- review all of your agreements to ascertain which contracts and customers or suppliers are affected by the new legislation;
- consider whether there is a need to amend any potentially unfair terms; and
- review your standard terms and contracting procedures, in particular to ensure that you can identify if you deal with any ‘small business’.