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A small business approach to unfair contract terms in standard form contracts

On 12 November 2016 protection was extended to include “unfair contract terms” in “standard form contracts” in an attempt to better cover small businesses.

If you run a small business (or have a client that does) your rights and actions are protected by Australian Consumer Law and, more broadly, under the Competition and Consumer Act 2010.

The legislation covers things like the repair, replacement or refund of business purchases, supplier refusal to supply goods or services, business behaviours that limit competition, false or misleading claims and so on.

On 12 November 2016 protection was extended to include “unfair contract terms” in “standard form contracts” in an attempt to better cover small businesses. And in 2017 the Australian Competition and Consumer Commission (ACCC) moved to ramp up its investigation and enforcement of these laws as it successfully took action against JJ Richards & Sons PTY LTD and launched proceedings against Servcorp LTD.

These cases stand as a timely reminder that the new unfair contract regime has significant implications for both small businesses and big businesses contracting with smaller counterparts.

It’s important that all business owners have a good understanding of what a standard form contract is and how you can protect your business from the ramifications of unfair contract terms.

Which contracts are covered?

A standard form contract is usually one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms.

Standard form contracts are typically used for the supply of goods and services to consumers in many industries, including telecommunications, finance, domestic building, gyms, motor vehicle rentals, travel and utilities.

Standard form contracts can be more specifically defined as:

  • a small business contract for the supply of goods or services including financial services or interests in land where:
  • one party to the contract employs fewer than 20 people
  • the upfront price payable does not exceed $300 000 (or $1million if the contract is more than 12 months)
  • a “standard form contract” prepared by one party where:
  • the other party has little or no opportunity to negotiate
  • the contract is offered on a “take it or leave it basis”.

When will a term in a standard form contract be considered unfair?

As mentioned, the ACCC administers laws against unfair contract terms in standard form contracts. The ASIC Act applies to the standard form contract for financial services, regulated by the Australian Securities and Investment Commission (ASIC).

Terms in a standard form contract will be considered unfair when:

  • there is a significant imbalance in the parties’ rights and obligations
  • the term is not reasonably necessary to protect the legitimate interests of the party advantaged by the term
  • the term will cause detriment to the small business if relied on.

For example, the court or tribunal will be looking at terms that enable one party to limit or avoid their obligations under the contract, terminate the contract for any reason, penalise the other party for breaching the contract or vary the terms of the contract.

What is the effect of having an unfair term in a standard contract?

So you believe you have identified an unfair term in a standard contract? What happens next?

  • Only a court or tribunal can decide if a term is unfair.
  • If the term is found to be unfair then the term will be void.
  • The remainder of the contract will continue to operate, provided it can do so without the unfair term.
  • If parties have suffered loss as a result of the void term, they may seek compensation.

If challenged, courts and tribunals will examine your contract for transparency and look to see if it is upfront, easy to read and clearly presented.

How can you protect your business?

Small business owners can’t afford to be naive about contract law. It’s important to apply a best practice approach to feel confident that you are protecting your business from risk. To achieve this it’s best to:

  • review and revise your standard form contract conditions and terms
  • identify and remove unfair terms
  • allow buyers the opportunity to negotiate and adequate time to read their contract.

Most importantly, invest in professional advice to make sure your contracts protect your business from financial and reputational risk.

You might like to visit the ACCC website for more information or get in touch with the BlueRock Partners team to talk to a contract specialist about your concerns.

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