7 Oct 2016

Are you a small business or have dealing with small businesses? Do you have or are you engaged under a standard form contract? Are you prepared for the new regime?

The extension seek to address the lack of bargaining power and vulnerability often faced by small businesses in contractual negotiations, where the more powerful contractor seeks to engage small businesses generally on a ‘take it or leave it’ basis.

Next month the protections currently provided to consumers under the Competition and Consumer Act 2010 (Cth) (the Act) will be extended to protect small businesses contracting under a standard form contract.

The new law will apply to:

  • standard form small business contracts that are entered into or renewed on or after 12 November 2016; and
  • the varied terms of any pre-existing standard form small business contracts that are varied on or after 12 November 2016.

The Regime

Contracts

A contract will fall under the new regime if the contract complies with the new definition of ‘small business contract’ and is a standard form contract.

A contract is a small business contract if:

  • the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
  • at least one party to the contract is a business that employs fewer than 20 persons; and
  • the upfront price payable does not exceed $300,000 (or $1,000,000 if the contract runs for more than 12 months).

A ‘standard form contract’ is generally prepared and printed by one party and the other party usually cannot negotiate the terms.

Unfair Terms

A term may be unfair if:

  • creates a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • isn’t necessary to protect the legitimate interests of the party it benifits; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Even if all three of the above criteria are met, the court may take into account other matters and will consider the transparency of the term and the contract as a whole.

The ACCC and ASIC have identified 8 of the most common examples of terms that are challenged as ‘unfair’; they include:

  1. Right to unilaterally vary the contract;
  2. Early termination fees;
  3. Limited/ no liability;
  4. Automatic rollover;
  5. Right to terminate agreement with no cause;
  6. Liquidated damages;
  7. Wide indemnities; and
  8. Forfeiture clauses.

Consequences?

If a term is declared ‘unfair’ by the court, it will be void and treated as if it had never been part of the contract.

This does not automatically void the contract.

Where possible, the court will seek to continue to bind the parties under the contract, with the exception of the unfair term(s).

Next Steps?

If you are a small business:

  • seek legal advice about any pre-existing contracts you think may contain unfair terms;
  • seek legal advice about any potential contracts that have been offered to your business; and
  • seek a legal review and advice about your businesses contracts to ensure that meet the new statutory regime.

If you are a large business:

  • conduct a full legal review of your contract suite;
  • seek legal advice regarding any current contract severance clauses;
  • seek legal advice regarding any pre-existing contract you think may meet the criteria for a ‘small business contract’; and
  • identify your small business clients.

This is only general information and does not constitute specific legal advice.  If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.

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