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Small businesses can now breathe easier thanks to new unfair contract legislationSmall businesses breathe easier thanks to new unfair contract legislation

By Lachlan Commins, Patterson Houen & Commins, Lawyers, Sydney. As a small business – whether supplying goods or services or buying them – it can often feel as though that the odds are stacked against you when entering into a standard form contract with a large organisation. Talk about being between a rock and a hard place, sometimes it can feel that either your brains or your signature are going to end up on the dotted line at the end of the day.

Well, get ready to breathe a sigh of collective relief because the Commonwealth government has just introduced legislation (Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015) which will allow unfair contract terms used in standard form contracts (valued at less than a prescribed threshold) with small businesses to be declared void and for the contract to continue to bind the parties if it can operate without the unfair term.

Essentially, the legislation extends the unfair contract term protections currently available to consumers under the Australian Securities and Investments Commission Act 2001 (for financial services and products) and the Australian Consumer Law (ACL) (for the supply of goods or services other than financial services or products including the sale or grant of interests in land) to cover small businesses entering into standard form contracts (valued at less than a prescribed threshold).

In order to be considered a ‘small business’ you must employ less than 20 people at the time of entering the contract.

Currently, the protections under the legislation are limited to low-value standard form contracts not exceeding $100,000, or $250,000 if the duration of the contract is longer than 12 months. The rationale behind this threshold is that it places the onus on small businesses to undertake their own due diligence for high-value transactions.

So what constitutes a ‘standard form contract’? Well, it’s any contract alleged by one party to the proceedings to be so unless the other party to the proceedings is able to prove otherwise. This means that if you are a small business and you are involved in proceedings in respect to an unfair term in a contract, the onus will be on the other party to prove that the contract is other than a standard form contract. In reaching its determination, the court will take into account the following:

  • whether one of the parties has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • whether another party was given an effective opportunity to negotiate the terms of the contract; and
  • whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

So finally, what constitutes ‘unfair’? It should be noted that contract terms that define the ‘main subject matter of the contractor that set the ‘upfront price payable under the contract’ are exempt from the legislation and therefore cannot considered to be unfair. A term will be unfair (subject to some exemptions) if:

  1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

In considering the above, the following will be taken into account:

  1. the extent to which the term is transparent; and
  2. the contract as a whole.

The upshot for small businesses is that they should be more readily able to enter into standard form contracts with larger organisations with confidence where the ‘bargaining power’ between the parties is unequal but the legislation can still apply to a contract between two small businesses of equal bargaining power – so be alert.

Larger organisations should also invest in undertaking a review and analysis of all their standard form contracts in use with small businesses to ensure that any ‘unfair terms’ are revised to the extent that they do not fall foul of the legislation. This may mean the organisation taking on a larger portion of risk than would have otherwise been assigned to the other party under the contract.

If you would like more information on the finer details of the legislation (including the class of contracts and contract terms to which the new legislation does not apply) a visit to your MSI lawyer would be productive.

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