Article by Stanislav Roth and Christina Guo.
On 12 November 2016, new legislation came into effect to extend consumer-style protections in respect of unfair contract terms to business-to-business standard form contracts. The provisions are generally aimed at providing better protections to small businesses.
Does this apply to your business?
- At least one of the parties must be a ‘small business’ (i.e. it employs less than 20 people, including casual employees employed on a regular and systematic basis).
- The upfront price payable under the contract is no more than $300 000 or $1 million if the contract is for more than 12 months.
- The contract is for the supply of goods or services or the sale or grant of an interest in land.
What terms may be unfair?
It is ultimately for the courts or tribunals to decide whether the terms are unfair. However, some broad guidelines and examples from different industries have been identified in the ACCC report. Some key terms are below:
Unreasonably wide or inaccurate powers. These include:
- Unrestricted rights to enter and inspect the property of the other party.
- Terms containing an incorrect or misleading statement about a contractor’s rights at law.
The power to unilaterally vary all terms, especially significant ones or terms that can cause detriment if varied by one party without any restraints. Some examples include:
- The ability to vary the product or service offering or price of contract without consent from the other party.
- Powers allowing the larger business to vary any term in an independent contractor’s contract, particularly policies, procedures or key performance indicators.
Broad powers to protect themselves against loss or damage like excessive or unreasonable indemnity clauses. Examples include:
- A clause requiring small business to indemnify the larger business for any loss or damage that the party might cause, regardless of whether the other party contributed to the damage.
- Liquidated damages clauses that are not a genuine estimate of losses relating to breach.
- Restraint of trade clauses may be unfair. The court will have regard to the length of the restraint, the restraint area, and the breadth of conduct.
An unreasonable ability to cancel or end an agreement as it suits them, such as:
- The power to terminate a lease for any breach of the contract or failure to comply with company code of conduct, regardless of how trivial, without having to provide the tenant with an opportunity to remedy such breach.
- Terms that automatically renew the contract if there is no allowance for reasonable notice, reasonable time to give notice stopping renewal or if the ability to exit a contract comes with a penalty.
What are the next steps?
If some of these contractual terms are sounding uncomfortably familiar, small businesses are first advised to bring these concerns to the attention of the other party to try and negotiate a solution. Disputes may also be solved through alternative dispute resolution schemes.
Under the ACL, only a court or tribunal (and not the ACCC) can rule a contractual term unfair. If they do, the term is considered void and not binding on the parties, though the rest of the contract will continue to apply.
Contact Source Legal if you need advice whether your standard terms of contract or any terms of your customers or suppliers may be ‘unfair’ under the new laws.