May 9, 2016

Fair’s Fair: Small Businesses Gain Unfair Contract Protections

Crooks, watch out! From 12 November 2016, there will be some important new amendments to the Australian Consumer Law and the ASIC Act.

These amendments will expand consumer protections to business owners. Starting in November, small businesses will be protected against ‘unfair’ provisions in contracts.

When Will the New Rules Apply?

There’s a few exceptions, but essentially, the amendments will apply where:

  • the contract is for the supply of goods or services, or the sale or grant of an interest in land;
  • at least one party to the contract is a small business at the time the contract is entered into;
  • the upfront price of the contract is $300,000 or less – or $1 million or less if the length of the contract lasts for more than 12 months;
  • the contract is a standard form contract; and
  • the contract is entered into, renewed or varied after 12 November 2016.

The amendments will also apply to contracts for financial services, as well as financial products regulated under the ASIC Act (loans, finance contracts and other credit contracts). For these contract types, interest payable under the contract is not included in the calculation of the upfront price.

What’s a Small Business?

A small business is defined as a business with fewer than 20 employees. This is measured by headcount including part-time and casual employees engaged on a ‘regular and systemic basis’.

What’s a Standard Contract?

A standard contract is an agreement where the terms and conditions are set by one party, with limited opportunities for the other to negotiate. A good example of this is your telephone contract. Normally, the contract is offered on a “take it or leave it” basis. (Actually, for phone providers, it’s more like: “take your phone and leave our shop”.)

What’s an Unfair Term?

Somewhat ironically, the new law doesn’t directly define what ‘unfair’ is, which means we have to do some digging.

For contracts relating to financial products and services, the ASIC Act provides that a term is ‘unfair’ if it:

  • would cause significant imbalance to the respective parties’ rights or obligations under the contract; and
  • is not reasonably necessary to protect the legitimate interests of the party benefiting from the term; and
  • would cause detriment to the other party if relied upon.

Both the Australian Consumer Law and the ASIC Act list several examples of what may be an ‘unfair’ term, including terms that would:

  • allow one party (but not the other) to terminate, renew or decline to renew the contract, or charge a fee or penalty for termination;
  • allow one party to unilaterally vary or amend the contract, including the upfront price payable or the description of the goods or services provided under the contract;
  • allow one party to limit its own liability, or impose a liability on the other party, such as an indemnity or limitation or exclusion of liability clause.

Some terms are protected from being found to be unfair, including terms that:

  • define the upfront price of the contract;
  • relate to foundational elements of the contract; and
  • are required or permitted by industry standards or codes.

What are the Consequences?

If you think a term is unfair, the first thing you should do is contact one of our solicitors. Contracts are confusing at the best of times, let alone when unfair provisions are at play. We can help you navigate this tricky area of law. Alternatively, you can contact the ACCC or ASIC. Their websites provide easy-to-follow guides for lodging a complaint . If your complaint is successful, the regulators may apply to the courts to get a ruling on whether the term is unfair.

If a term is found by the Court to be ‘unfair’, it will be void. This means that it will be taken to have no effect on the parties to the contract. Depending on how integral the term was to the contract, your agreement could also be made void. If the term wasn’t very important, the contract will continue as though the unfair term never existed. This saves you from throwing the contractual baby out with the legal bathwater.

On top of this, the court might also award you damages or an injunction against the other party. At the very least, they’ll probably have to pay a fine.

The Takeaway

The new amendments apply to any trader in Australia – that includes small businesses and sole traders.

If your business uses standard form contracts, it’s worthwhile making sure they’re fair and reasonable. (This holds true regardless of whether you’re caught by this new law. Just try not to be a jerk.)

For small businesses, the new laws also give you some ‘teeth’ to fight back against large corporations. If you think a term is unfair, speak up. It may save you a lot of time and money.

ben