New law protects small businesses from unfair contract terms

On 12 November 2016, the new unfair contracts legislation commenced providing greater protection to small businesses against unfair terms in standard form contracts. Under the new law, unfair provisions in standard form contracts will be rendered void.

What type of contracts will the law apply to?

This law will only apply to standard form contracts. A court or tribunal will consider all relevant factors to determine whether a contract is a standard form contract, however often there is unequal bargaining power between the parties and these contracts are given with little or no opportunity to negotiate –  offered on a ‘take it or leave it’ basis.

The law will apply to standard form contracts where:

1. The Contract is for the supply of goods or services; or the sale or grant of an interest in land;
2. At least one of the parties is a small business which is defined as a business that employs less than 20 people on a regular and systemic basis; and
3. The upfront price payable under the contract is no more than $300,000.00, or where the contract will apply for more than 12 months, no more than $1 million

Which contracts won’t the law apply to?

1. Contracts entered into before 12 November 2016.
2. Shipping contracts.
3. Constitutions of companies, managed investment schemes or other kinds of bodies.
4. Certain insurance contracts.
5. Contracts in sectors exempt by the minister

What terms are considered unfair?

Ultimately it is up to a court or tribunal to decide whether a term is unfair; however the law gives the following examples of terms that may be considered unfair:

1.  Terms that enable one party, but not the other, to:

(a)  Avoid or limit their obligations under the contract;

(b)  Terminate the contract; or

(c)  Vary the terms of the contract; and

2. Terms that penalise one party, but not the other, for breaching or terminating the contract.

The law makes it clear that following terms will not be considered unfair:

1. Terms that define the main subject matter of the contract;
2. Terms that set the upfront price payable; or
3. Terms that are required or expressly permitted by a law of the Commonwealth, or a state or a territory.

In conclusion

Now is an opportune to review your terms and conditions to make sure they are in line with the new laws.

If you require advice or further information in relation to any of the matters discussed in this article, please contact our Corporate & Commercial team on 03 5273 5263.