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Commercial and Corporate update: Mind your Ts and Cs! — Unfair contract protections have now been extended to small businesses

Nov 19, 2015

Since 2010, the Australian Consumer Law (ACL) has prohibited the inclusion of unfair contract terms in standard form contracts with individual consumers, such as the agreement which you typically sign up to when you join a gym.

These prohibitions have now been extended to apply to standard form contracts with ‘small businesses’ which are valued at less than the prescribed thresholds. If you provide goods or services to small businesses, you need to make sure you are aware of these changes.

What is a ‘small business’?

A party to a contract is considered to be a small business if it has fewer than 20 employees, on a head count basis. This means that each full-time employee, part-time employee and casual employee (employed on a systematic basis) will be counted as 1 employee, regardless of the number of hours that they work.

Which contracts are captured by these changes?

The unfair contract provisions will apply to standard form contracts with small businesses where:

  • the up-front contract price is $300,000 or less; or
  • the contract has a duration of more than 12 months and the up-front contract price is $1,000,000 or less.

The ACL does not contain a definition of “standard form contract” but generally a contract which contains standard terms which are pre-prepared by one party to the contract and which the other party cannot negotiate would be a standard form contract. For example, standard delivery terms attached to an invoice for the delivery of goods.

The upfront contract price is the consideration which will be paid for the total supply under the contract, as disclosed by the supplier at or before the contract is entered into. For example, if the price is payable in instalments over several months the upfront contract price will be the total amount of the instalments.

Any amounts which are dependent on a particular event occurring, such as termination fees, are not included in the upfront contract price.

When is a term ‘unfair’?

Factors which indicate that a term of your contract may be unfair are if the term:

  • results in a significant imbalance between the parties’ rights and obligations;
  • is not reasonably necessary to protect your business’ legitimate interests;
  • would cause detriment (financial or non-financial) to the customer if you enforced it; or
  • is not transparent.

Examples of terms which may be unfair are those that provide for continuing automatic renewal of the contract or clauses which allow one party to unilaterally vary the contract term, terminate the contract or limit their obligations.

If an internet service provider enters into a standard form contract with a small business which allows that provider to vary fees at any time, without giving notice or allowing the small business the option to end the contract, that term could be unfair.

Consequences of including unfair terms in your contracts

The regulator or a party to the contract will be able to make an application to the court if they think that a term in a small business contract is unfair. If the court agrees, the contract terms which are considered to be ‘unfair’ will be declared void, which means that they are effectively deleted from the contract and cannot be relied upon by either party. The remainder of the contract will continue to bind the parties, as long as the contract can operate without the unfair term.

What you should do now

There is a 12 month grace period before the provisions will apply to contracts with small businesses. After this period, the ACL will apply to new contracts with small businesses, as well as contract renewals and variations of existing contracts with small businesses. This means that now is the time to review your standard form contracts to ensure that their terms are fair.

More information

If you need any assistance or advice, please contact Jeremy Goldman , Principal Lawyer, on (03) 8600 8886 or jgoldman@kcllaw.com.au, or Daniel Kovacs, Principal Lawyer, on (03) 8600 8859 or dkovacs@kcllaw.com.au.

Note: This update is a guide only and is not intended to constitute legal advice.