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Stephen Curtain, Aitken PartnersBy Stephen Curtain, Aitken Partners, Lawyers, Melbourne.

Earlier this year we wrote about the New Protection for Small Businesses on Unfair Contract Terms. After months of debate in both the House of Representatives and the Senate, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 was passed and will come into effect on 13 November 2016. Further to this article, I outline in more detail what is considered an unfair term and what YOU need to consider.

What is an Unfair Term?

  • The legislation defines an unfair contract term as a term that would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
  • The court will consider the transparency of the term in question and how clear it was to the receiving party what it is agreeing too including when read in the context of the contract as a whole.

Key provisions exempt from Unfair Term Conditions

A number of key provisions within a contract are expressly exempt from these provisions and so will not be void if apparently unfair including:

  • a term to the extent that it defines the main subject matter of the contract;
  • terms which set out upfront price under the contract; and
  • terms required or expressly permitted by State or Commonwealth law.

Additionally, the unfair terms provisions will not apply to the constitution of a company or insurance contracts which are governed by separate laws.

Examples of unfair terms

There remains some uncertainty as to what provisions may be considered unfair. The following terms will be considered unfair:

  • a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
  • a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
  • a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
  • a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
  • a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
  • a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
  • a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
  • a term that limits, or has the effect of limiting, one party’s right to sue another party;
  • a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
  • a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract;
  • a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.

As is easily discernible from the above list, most of these examples relate to terms granting unilateral powers to a party. Terms, especially those granting unilateral power to a party, will need to be considered on their merits. For example, a provision that allows one party to unilaterally adjust a payment price may be found unfair, however such a finding would be less likely if it includes a reasonableness requirement.

Next step forward

The key action to take is review all current business to business standard form contracts. It is important to ensure that the obligations and rights under the contract are clear and easy to understand. The court will consider the transparency of the term when making a finding as to whether or not it is unfair. Additionally, by ensuring the other party to the contract clearly understands its obligations at the time of executing the contract, you will mitigate the risk of a contract term being found to be void due to unfairness.

Accordingly, in relation to unilateral terms, consider the following:

  • Is there are reasonableness requirement
  • In the context of the contract as a whole would the term be considered unfair
  • Is the other party given the same right in another term

If you are unsure it is better to seek advice than proceed without regard to the possible ramifications the new small business protections against unfair contract terms may have on your business to business dealings.

Contact the author directly by email or by telephone.

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