No matter whether your business is large or small, you should be aware of the Unfair Terms in Small Business contract law. This law both protects small businesses from being taken advantage of by unfair terms in standard business contracts, and larger businesses to ensure that they will not be guilty of including unfair terms. While it’s clear that the law protects smaller businesses by ensuring the fairness of business-to-business contracts, the Australian Competition and Consumer Commission (ACCC) has also emphasised that it is in the best interests for large businesses to comply as well to avoid enforcement action and sanctions.
What Contracts are Included?
The law applies to a contract which deals with the transfer of goods, provision of services or the sale of land, and was entered into (or renewed) on or after November 12, 2016. The contract must also involve at least one party that qualifies as a small business. A business qualifies as a ‘small’ dependent on the Head Count Test, which basically tallies the number of employees. If the business in question employs less than 20 people on a regular basis (including casual and part-time employees, but not independent contractors) then it will qualify as a small business. Additionally, the price terms of the contract must be lower than $300,000 if for less than one year, or lower than $1 million if for more than one year.
What Type of Contract Term is ‘Unfair’?
A contract term will only be considered unfair if and when all three of the following elements are present:
- Imbalance: A term will be considered ‘unfair’ if it will cause a significant power imbalance between the parties. That is, one party will have significantly more rights and/or less obligations outlined in the contract.
- Necessity: A term will be considered ‘unfair’ if its presence is unnecessary. That is, if it is not essential to protect the legitimate interests of the parties to the contract.
- Detriment: A term will be considered ‘unfair’ if it will cause some harm to a party when applied. The harm caused may be either financial or otherwise in order to qualify as a legitimate detriment.
Examples of Unfair Contracts:
Unilateral Variation: Terms that empower one of the parties to the contract to avoid or limit their obligations are contracts that are subject to unilateral variation. When one party has the right to vary the terms of the contract, the contract will be considered unfair to the party without the right to vary the terms. In the case of a customer-provider contract, the provider is required to give the customer notice of any material change to the contract, and a customer should be allowed to terminate the contract without penalty if the changes are to the customer’s detriment.
Hair-Trigger Termination: A term that allows one party to terminate the contract for any possible breach will be considered unfair. To avoid an unfair hair-trigger termination, the ACCC recommends that grounds for termination be included in the contract.
Early Termination Charges: Though some early termination charges may be allowable, when these charges are excessive they may be considered unfair. Early termination charges should be an estimate of loss that takes into account the amount saved by the non-terminating party by not having to completely fulfill the contract.
Automatic Renewal: In order for automatic renewals to be an acceptable contract term, they must be adequately disclosed; notice must be sent regarding the renewal; the provider cannot change the cancellation date of renewal; and early termination charges for post-renewal date cancellation must be reasonable.
Limited Liability: Terms that limit liability must be specific and reasonable to be acceptable terms. Parties may not limit liability excessively and must clearly not limit any legal rights that the customer would otherwise have a claim to for incurred losses.
Broad Indemnities: If a contract includes an overly broad indemnity clause, the contract may be voidable due to unfairness. An overly broad indemnity clause may mean that a customer is liable to indemnify a provider when the provider or a third party was negligent, caused, or even contributed to the misuse of the provided service.
Misleading Statements About Rights at Law: If a contract excludes one of the parties’ rights at law, it may be considered an unfair contract and may even constitute a breach of Australian Consumer Law if the contract language insinuates that the contract terms are to be prioritised over existing law.
The Unfair Contracts legislation will potentially affect many of the “Standard Form” contracts that are entered into.
“Standard Form” contracts are those where there has been no negotiation of terms and conditions and where one of the parties has fewer than 20 employees.
The Australian Competition and Consumer Commission has announced that it will be concentrating on some of the bigger industries first up but in due course will move to a wide ranging review of many standard form contracts including ones we deal with everyday.
We have already been asked to review contracts in anticipation of this new legislation.
It is important to seek specific advice regarding your circumstances as this fact sheet provides general information only and does not constitute legal advice.