Take it or leave it: review your standard contracts or run the risk of them being unenforceable

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Small businesses, like consumers, can be vulnerable when it comes to standard form contracts. These contracts usually get offered on a ‘take it or leave it’ basis, and for those who lack the legal resources, bargaining power and funds to understand or negotiate contract terms this can be detrimental. The existing laws provide protection to individual consumers for unfair contract terms, but not for small businesses.

To address this problem, a Bill extending the unfair contract term protections to small business contracts was passed on 20 October 2015. The Bill received Royal Assent on 12 November 2015 and is now subject to a transitional period of 1 calendar year, meaning that all businesses still have about 7 months to review their standard form contracts before the laws come into force on 12 November 2016.  If they don’t, they risk important contract terms being void and unenforceable in any contracts that they enter with small businesses on and from this date.

The legislation makes unfair terms void in standard form contracts entered into by ‘small businesses’. In addition, it only applies to contracts that do not exceed an ‘upfront price payable’ of $300,000 (or $1 million for contracts lasting more than 12 months).  These are typically your terms and conditions of sale or purchase, supply agreement and the like.

For a definition of ‘unfair contract terms’ and examples of when a term may be deemed to be unfair, please click here.

What is a ‘Small Business’?

Under the new law, at least one ‘small business’ must be a party to the contract. A small business is defined as a business that employs fewer than 20 persons.  This is calculated by a simple head count of employees, which includes casuals who are employed on a regular and systematic basis.

Impact on Big Business

If you are a big business, you need to reassess your standard form contracts to ensure they do not contain unfair terms when you are dealing with small businesses on and from 12 November 2016.

Many big businesses might dismiss the risk of enforcing an unfair contract term as it is not an offence to include unfair terms in a contract to which a small business is a party. After all, the contract will continue to operate by excluding the unfair term.  The downside of this however, is that continuing to issue contracts to small businesses without addressing any potential ‘unfair contract terms’ can have a disastrous impact on big businesses with unintended consequences in enforceability of a contract.  This is particularly because the definition of an ‘unfair term’ is broad.  Although pecuniary penalties do not apply, the court can still award compensation to small businesses for losses flowing from the unfair term.

Big businesses may also consider structuring the price of contracts to exceed the $300,000 or $1million (for 12 month contracts) thresholds to avoid the application of the legislation.

Impact on Small Business

In a nutshell, if you have less than 20 employees, you can use this legislation as a bargaining tool to your advantage. The amendments provide a level playing field for small business customers working with bigger businesses through standard form contracts.

When negotiating contracts to which unfair contract term provisions apply, small businesses should still seek to remove the unfair contract terms. Given that the law is on your side, amending the contract upfront will avoid an argument down the track, which usually means saving both time and money!

Bear in mind that small businesses still need to undertake the appropriate due diligence and continue to vigorously negotiate contracts for high-value contracts that exceed $300,000 (or $1 million if the duration is for more than 12 months). This is because these contracts are not protected by this legislation.

Additionally, small businesses that issue contracts to other small businesses need to ensure no unfair contract terms exist. Otherwise the same problems of unenforceability apply.

Tips for all Businesses

Businesses of all sizes should:

  • review all their standard form contracts now to ensure that the terms of their contracts will not potentially be declared void and unenforceable where one party to the contract is a small business;
  • consider having different contracts for large and small businesses to manage and minimise risk;
  • develop internal procedures for enquiring about the number of employees in the business they are dealing with to determine whether this legislation applies and to ensure the appropriate contract is used if the business decides to have a different contract for small businesses; and
  • review existing contracts before they may be renewed or varied. These unfair term provisions apply to terms that are amended after 12 November 2016.

The new legislation is a step to ensuring that contract terms respect the legitimate business objectives of both big and small contracting parties to provide a more balanced playing field. The best way to minimise risks for both parties is to review all contracts now, and avoid being caught out once the laws commence on 12 November 2016.

At Bryks Lawyers, we have extensive experience in dealing with the Competition and Consumer Act and the Australian Consumer Law. Should you have any questions about the proposed amendments or need assistance please contact us today to start the conversation.

This information is for information purposes only and is not legal advice. You should obtain advice that is specific to your circumstance and not rely on this publication as legal advice. Please contact us if you wish for us to advise you on any issue you may have arising from this publication.

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