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Unfair Contract Provisions extended to protect Small Businesses

Commercial Law, General

In 2010 the Commonwealth Government passes the Competition and Consumer Act, which largely replaced the Trade Practices Act. Amongst other things, this introduced the concept of Unfair Terms in consumer contracts and when these might be found to be void.

For some time there has been talk of extending these protections to Small Businesses, and in late October legislation was passed doing just that.

While the legislation is unlikely to come into force until late 2016, it is important that Small Businesses, and those who enter into contracts with them, be aware of the provisions, and when/how a term of their contracts might be found to be unfair and therefore unenforceable.

Under the legislation a contract term may be declared void if all of the following criteria are met:

1.       The contract is a Small Business Contract;

2.       The term is unfair; and

3.       The contract is a Standard Form Contract.

The legislation further provides guidance on how each of these criteria are met.

What is a Small Business Contract?

A small business contract is any contract which satisfies all of the following conditions:

1.       The contract is for a financial product, supply of financial services, supply of goods or services, or the sale or grant of an interest in land;

2.       At the date of the contract at least one of the parties employed fewer than 20 persons (which, in certain circumstances, may include casual employees); and

3.       Either of the following apply:

a.   The upfront price under the contract is not more than $300,000; or

b.    If the contract is to last for longer than 12 months, the upfront price payable is not more than $1,000,000.

When is a term unfair?

A term of a contract is unfair if:

1.       It would create an imbalance between the parties;

2.       It is not reasonably necessary to protect the legitimate interests of the party advantaged by the clause; and

3.       It would cause detriment to a party if the clause was relied on.

The legislation also provides some guidance as to what type of terms might be unfair (e.g. granting one party unilateral rights to vary the contract, allowing one party but not the other to cancel the contract).

Of course, just because a clause falls within one of the examples in the legislation does not mean it will be unfair. Conversely, there have been cases where clauses have been found to be unfair, even though they are of a type not described in the legislation. The main question will be whether the specific clause falls within the 3 criteria described above.

What is a Standard Form Contract?

There is no set criteria for what constitutes a standard form contract, however the legislation does list some matters relevant to the determination. These include whether only one party had all the bargaining power, whether there was an opportunity to negotiate contracts and whether the contract was provided on a “take it or leave it” basis.

Some examples of contracts which might be standard form contracts might include:

1.       Online terms and conditions;

2.       Standard form retail leases; or

3.       Standard trading terms and conditions.

It should also be noted that, if one party claims a contract is a standard form contract, then this will be assumed to be correct, unless the other party proves otherwise.

Final Points

It is important to note some points regarding unfair terms:

1.       A term being found to be unfair does not automatically invalidate a contract. If the contract is capable of being enforced without the clause then the remaining provisions stay in effect.

2.       Certain terms are not capable of being unfair, including those which describe the subject matter of the contract (for example the amount being paid, or the goods being bought).

3.       It is preferable to have a balanced, fair term in your contract, which can provide you with some protection, rather than a one sided term, which may be completely struck out.

4.       The legislation will not apply to contracts entered into prior to the protections coming into effect, however it will apply to any renewal or variations of such contract.

5.       Only a small business, or the regulator, can seek to rely on these protections. A “Big Business” party to a small business contract does not gain the protections of the legislation.

If you have concerns regarding whether your standard contracts may fall foul of these provisions, or want further advice as to when and how they might apply, please contact our Commercial Law Team.