The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015, dealing with unfair contract terms, commences on 12 November 2016 and will provide new rights for small businesses dealing with standard form contracts. Many small businesses enter into contracts without the resources to adequately understand the implications of the contract terms, the resources to negotiate such terms, or the relative bargaining power for such negotiations. The amendments will give courts the authority to void contract terms they declare unfair.
What is an unfair term?
The term ‘unfair’ is deliberately ambiguous and its parameters are largely undefined, however the intention is to cover contract terms which:
- Would cause a significant imbalance in the parties’ rights and obligations under the contract; and
- Are not reasonably necessary in order to protect a legitimate interests of the party who would be advantaged by the term; and
- Would cause detriment (financial or otherwise) to a party if it were to be relied upon.
In particular, the legislation is concerned with terms that only allow one party to unilaterally vary the terms of the contract (such as its price), or to terminate the contract without penalty.
Which contracts does this law apply to?
This law will apply only to small business standard form contracts entered into or updated on or after 12 November 2016. That is, at least one party must be a small business (employs fewer than 20 people) and the upfront price under the contract must not be more than $300,000.00 (or, $1,000,000.00 if the contract is for a period longer than 12 months).
Standard form contract
Generally, a standard form contract is generated unilaterally by one party, and offered to the other party on a ‘take it or leave it’ basis, whereby they cannot alter or negotiate the terms of the contract.
Prior to this legislation, small businesses have had limited means to protect themselves from unfair contracts. Given their lack of resources or ability to negotiate contracts, small businesses are quite susceptible to unfair contracts. The new legislation provides for circumstances whereby a party has not necessarily acted unethically, but the terms of the contract may cause detriment to the other party if acted upon. Further, the focus of the laws is on the contract terms themselves, meaning that an unfair term does not need to be realised before it can be declared void. Rather, if the term may potentially be used unfairly, the court may have sufficient reason to declare it void.
Most importantly, this legislation aims to deter parties from including unfair terms in their contracts from the outset, giving small businesses more bargaining power throughout the process.
If you issue standard form contracts to small businesses, now is the time to update your contracts and ensure they comply with the new legislation.
If you are a small business, from 12 November this year you will have a greater ability to challenge terms of standard form contracts that are unfair.
In either case Austin Giugni Martin can assist you in dealing with the new legislation. If you would like to discuss the above, please contact us on (02) 8076 4539.
This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. The publication reflects the law at the date the publication was written, which may differ at the date the publication is being read. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.
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