The swinging pendulum: unfair contracts for small businesses

It has long been the case that small businesses have found themselves engaging with large businesses who have a ‘take it or leave it’ attitude when it comes to contracts, with larger businesses often insisting on terms that heavily favour them.

From 12 November 2016 the Australian Consumer Law, which is set out in Schedule 2 of the Competition and Consumer Act, will be amended to include provisions to protect ‘small businesses’ who enter into ‘small business contracts’. Similar changes are being made to the Australian Securities and Investments Commission Act for financial services and products.

The Competition and Consumer Act changes will give small businesses the protections currently provided to consumers, whereby a term of a contract will be void if the term is unfair and the contract in question is a ‘standard form contract’.

What is a small business contract and a standard form contract?

A ‘small business’ is defined as being one which has less than 20 employees.

A ‘small business contract’ is a standard form contract which is:

  • entered into by a small business (whether as the customer or the supplier);
  • is for the supply of goods and services or for the sale or grant of an interest in land; and
  • the upfront price payable pursuant to the contract is not more than $300,000 or, if the contract is for more than 12 months, not more than $1,000,000.

A standard form contract is, in essence, a contract which contains standard terms that are offered by a business to everyone. The Australian Consumer Law sets out a number of factors which need to be taken into account in determining whether a contract is a standard form contract. These factors include the following;

  • whether one of the parties has all or most of the bargaining power;
  • whether the contract was prepared by one party before any discussion regarding the transaction occurred;
  • whether the other party was, in effect, required to either accept or reject the terms of the contract. That is, was the contract presented to the other party on a ‘take it or leave it’ basis; and
  • whether the other party was given the opportunity to negotiate the terms of the contract.

It is important to note that if court proceedings eventuate, where a party alleges that a contract is a ‘standard form contract’ the court will presume this to be the case, unless the other party can prove otherwise.

Unfair clauses

A clause will be unfair if it:

  • causes a significant imbalance in the parties’ rights and obligations;
  • is not reasonably necessary to protect the legitimate interests of the party who will benefit from the term; and
  • would cause detriment to a party if it were relied upon or applied.

In respect of the last requirement, it is important to note that the detriment is not limited to there being a financial detriment. The Australian Consumer Law provides examples of terms that will be deemed unfair and these generally are terms that tend be more favourable to one party over the other.

For example, a term that penalises one party but not the other for a breach or termination of the contract, or a term that allows one party but not the other to avoid or limit their performance of a contract, will be deemed ‘unfair’ under the legislation.

Another example of an unfair term is where a clause in the contract permits one party to vary the goods or services to be supplied, or the interest in land to be sold or granted.

What happens when a term or clause in a contract is deemed unfair?

A party to contract will be entitled to lodge an application with the courts and seek a declaration that a term is unfair. A term that is deemed unfair will be deemed void and cannot be relied on by the person who has the benefit of the term.

In some circumstances where a term is deemed unfair it will result in the remainder of the contract being unenforceable. This would only occur where the remainder of the contract could not operate without the term or terms deemed to be unfair.

The court also has an ability to award compensation to a party that has suffered loss or damage as a consequence of an unfair term. This might happen where a party has relied on an unfair term and, as a consequence of this, the other party to the contract has suffered or is likely to suffer loss or damage.

While these changes add another layer of complexity, they also have the potential to benefit many small businesses.

Before this legislation takes effect, all businesses should review their current contracts to ensure that they comply with the legislation and do not run the risk of becoming unenforceable later on. 

A shorter version of this article was originally published in The Stock Journal on 11 August 2016.

Practice Area: Corporate, Commercial & Business , Court Litigation & Dispute Resolution

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