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That’s unfair! Small Business and New Unfair Contracts

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Unfair contract laws which apply to consumer agreements will be extended to protect small businesses from 12 November 2016. Small businesses are now recognised as consumers and need similar protection.

The Commonwealth Treasury report from their survey¹:

  • 30 per cent of small businesses spend less than nine minutes reviewing standard form contracts;
  • 60 per cent of small businesses experienced unfairness in terms and conditions; and
  • 44 per cent of small businesses experienced some harm as a result of unfair terms.

Small business owners need to understand both their rights (when entering) and their obligations (when preparing) standard form contracts before the legislations takes effect later this year.

What is an ‘unfair’ contract term?

Standard form contracts cannot contain terms that:

  1. Cause a significant imbalance in rights; or
  2. Are not reasonably necessary to protect the business’s interests; or
  3. Cause any detriment to the consumer or small business.

Some examples of unfair terms may include:

  • Unilateral variations: where the service provider has the right to change its prices or services at any time without prior notice to the small business;
  • Automatic rollover: where despite the 12-month contract, a term has the effect of automatically renewing the contract for a further year, unless the small business gives written six months notice;
  • Lock-in terms: where the small business does not have the right to end the contract, even if the service provider increases the price significantly; or
  • Liquidated damages: where the small business must pay a large fee if it wishes to terminate the contract early.

It is up to the customer to decide if the price is fair before they enter the contract.
The unfair contract laws do not apply to terms that merely set out the price.

Which contracts are affected?

These laws only apply to contracts that are ‘standard form’. There is no specific definition of a ‘standard form’, but some indications of whether a contract is standard include whether there is opportunity to negotiate the terms before execution (‘take it or leave it’) or if its terms are non-specific to the particular transaction. Since the law targets small business, one of the parties to the contract must have less than 20 employees and the upfront price must be less than $300,000 (or $1 million for multiyear contracts).

What do you need to do?

Before these laws take effect, you should identify any significant ‘standard form’ contracts that you are a party to. If you have fewer than 20 employees, these laws are likely to impact most of the standard form contracts that you are party to (either as supplier or recipient). Equally, businesses that deal with small businesses will need to review their standard form contracts to check that they comply.

Please contact our Business division if you require further information or assistance to comply with the new laws.

¹Source: The Commonwealth Treasury, on behalf of CAANZ, undertook a survey from 23 May 2014 to 1 August 2014 on business contracting practices and unfair contract terms.