Unfair Business Contracts Legislation

Extended to Protect Small Business

On 12 November 2016, the unfair contracts legislation (under the Australian Consumer Law) was extended to cover certain business contracts.

Court’s Powers – Consequences

Under the legislation, a Court can declare a term of a “standard form contract” to be invalid if it finds the term to be “unfair”. (The rest of the contract will continue to be binding if it is capable of operating without the unfair term).

When the Legislation Applies

The legislation applies to “standard form contracts” entered into or renewed on or after 12 November 2017 for:

•  the supply of goods or services; or
• the sale or grant of an interest in land (including leases) -

where:

• at least one of the parties is a “small business”; and
• the upfront price payable under the contract (excluding interest) is no more than $300,000 (or $ 1 million if the contract is for more than 12 months).

What is a “Small Business”?

Under the UCL “small businesses” are businesses that employ less than 20 people, including casual employees employed on a regular and systematic basis. 

What is a “Standard Form Contract”?

Generally, a “standard form contract” is a contract that has been prepared by one party to the contract and the other party has had little or no real opportunity to negotiate the terms, i.e. the offer is made on a “take it or leave it” basis. 

Relevant factors include whether 

• one of the parties has all or most of the bargaining power relating to the transaction;?
• the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;?
• another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;?
• another party was given an effective opportunity to negotiate the terms of the contract;?
• the terms of the contract take into account the specific characteristics of another party or the particular transaction.

Contracts Excluded

The following contracts are not covered by the Act: 

• Shipping contracts
• Constitutions of companies, managed investment schemes or other kinds of bodies
• Certain insurance contracts (e.g. car insurance).

What is an “Unfair Term”?

To be unfair, a term must:

• cause a significant imbalance in the parties’ rights and obligations; and ?
• not be reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
• cause financial or other detriment (e.g. delay) to a small business if it were applied or relied upon. ?

Examples of terms that may be “unfair” include those that enable one party (but not the other) to:

• avoid or limit their obligations under the contract (e.g. a contract for removal services that allows the removalist to avoid responsibility for any property damage caused by their negligence);
• terminate the contract for any reason (e.g. franchise agreement that allows?a franchisor to terminate a franchisee for committing a certain number of breaches of the agreement, regardless of the severity of?the breach or whether the franchisee remedied the breaches); ?
• penalise the other party for breaching or terminating the contract (e.g. a contract for waste management services that penalises businesses for cancelling their contract before the end of the term, while allowing the provider to cancel at any time without penalty; ?
• vary the terms of the contract?(e.g. contract for internet services that allows the provider to change their pricing at any time, without giving the small business an opportunity to cancel the contract in return. ?

A factor relevant to the determination whether a term is “unfair” is whether the term is “transparent” i.e. legible, expressed in reasonably plain language presented clearly and readily available to any party affected by the term. 

Excluded Terms

The following types of provisions/terms are excluded from the operation of the legislation:

• terms that define the main subject matter of the contract (i.e. the goods or services being sold);
• terms that set the upfront price payable;
• terms that are required or expressly permitted by a law of the Commonwealth, or a state or a territory (e.g. permitted under the Franchising Code or another prescribed industry code).

If you would like to discuss any aspect of this article or the unfair contracts legislation with us, please contact Rod Stumbles.