Unfair contract terms for businesses
New laws will provide greater protection to small businesses from unfair contract terms. These changes will provide the same protection currently enjoyed by consumers in standard form contracts.
A standard form contract is a contract that has been prepared by one party to the contract and is not subject to negotiation between the parties. In other words, it is offered on a ‘take or leave it’ basis.
Standard form contracts are nothing new; small businesses enter into them regularly for financial products and services. Contracts for business loans and credit cards, for example, are types of standard form contracts.
The law will apply to standard form contracts entered into or renewed on or after 12 November 2016, where:
- the contract relates to the supply of goods or services or the sale or grant of an interest in land
- at least one party to the contract is a small business (employs fewer than 20 persons)
- the upfront price payable under the contract does not exceed $300,000, or $1,000,000 if the contract duration is no longer than 12 months
Businesses should review their standard form contracts to remove any terms that could be considered unfair before the law comes into effect on 12 November 2016. Examples of terms that may be unfair, include:
- terms that enable one party (but not another) to avoid or limit their obligations under the contract
- terms that enable one party (but not another) to terminate the contract
- terms that penalise one party (but not another) for breaching or terminating the contract
- terms that enable one party (but not another) to vary the terms of the contract
Ultimately, if a court or tribunal finds that a term is ‘unfair’, the term will be void and non-binding on the parties. However, the remainder of the contract will continue to bind the parties if it is capable of operating without the unfair term.
Business owners should identify any terms in affected contracts which might be at risk, for example, those which cause a significant imbalance in the rights to the parties, to ensure compliance.
To determine whether any of your existing contracts are likely to be affected:
- identify those contracts which are at risk of being considered ‘standard form’, for example, contracts which typically involve very little negotiation.
- know the size of the party you are entering into the contract with - not only at the time of entry into the contract, but also at each renewal.
- calculate the upfront price payable under each contract to identify those which are valued at less than $300,000 or $1,000,000 if the contract extends for more than 12 months.