Small businesses will soon enjoy the benefits of protection against unfair contract terms in their dealings with other businesses. Currently, only consumers who enter into standard form contracts can claim protection
from unfair contract terms under the Competition & Consumer Act 2010 (Cth) (the Act). However, small business can be just as vulnerable, often lacking the bargaining power to negotiate changes to their B2B contracts.
The Government has described the amendments to the Act as one which will “level the playing field in commercial transactions”.
The protection will apply to businesses with fewer than 20 employees at the time of the transaction and where the upfront price payable under the contract is either:
1. $300,000 or less; or
2. $1,000,000 or less if the contract lasts more than 12 months.
Pursuant to section 24 of the Act, a term is unfair if:
1. it would cause a significant imbalance in the parties’ rights and obligations under the contract;
2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. it would cause detriment (financial or otherwise) to a party if it were applied or relied on.
All three limbs of the test must be made out, and the court must consider the contract as a whole before a term will be deemed ‘unfair’. Common examples of unfair terms include terms permitting unilateral changes
by one party, terms limiting the rights of one party and terms which permit the assignment of a contract to the detriment of the other without their consent.
Standard form contracts are usually template documents produced by one party and offered on a “take it or leave it” basis. Courts will consider:
1. whether one of the parties has all or most of the bargaining power relating to the transaction;
2. whether one party was, in effect, required to either accept or reject the contract in the form presented; and
3. whether the terms of the contract take into account the specific characteristics of the transaction.
The Legislation will affect all contracts made on or after 12 November 2016, and will also apply to existing contracts that are renewed after this date. Businesses have a one year grace period to review and amend their
existing standard form contracts to ensure compliance.
We recommend seeking advice on your contract terms if you are unsure about the legal or practical implications; however, the extension of the unfair contracts regime will provide comfort to small businesses that cannot
afford to negotiate or seek such advice on its contracts.