Unfair contract terms: are you ready?

On 12 November 2016 the new laws extending protection against unfair contract terms to small business comes into effect. These laws, which previously just afforded protection for consumers is now being extended to protect small business.

The laws apply to contracts where one or more parties is a small business. This means that it could be with a bigger player (like Coles or Woolworths) or contracts between small businesses. It applies to ‘standard form contracts’ which is basically one that is deemed ‘non-negotiable’ by one side. You either sign it or they move onto someone else.

Who is a ‘small business’?

Small business is defined as a business with less than 20 staff (casual’s aren’t counted unless they are regulars). They can be sole traders, partnerships or proprietary limited companies. The provisions will apply to contracts that are:

  1. Less than $300,000 or
  2. Less than $1million if the contract goes for longer than 12 months.

The laws will be applicable to any contracts that come into force on or from the 12th November. It does not apply retrospectively. Any contract that is renewed from this date will also be subject to these laws.

What is an unfair contract term?

A contract term is unfair if:

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

Whether or not a term is unfair depends on consideration of the contract as a whole and whether or not the particular term is transparent and not hidden (e.g. if it’s in plain language and presented clearly to the party affected by the term).

Some examples of contract terms are:

  1. Unilateral variation of a contract (e.g. a party may amend their pricing and services and apply them to the contract without first getting the other party’s consent)
  2. Wide indemnity clauses (e.g. indemnifying one party for ‘all losses and liabilities’ even if that party contributed to that loss or liability somehow)
  3. Automatic rollovers – where a contract automatically ‘rolls over’ to a further term (e.g. 12 months) without the consent of the small business (and where penalties may apply if the small business doesn’t want this arrangement to continue).
  4. Termination for convenience clauses plus damages – where one party has the right to terminate early but still demand payment up until the end date of the contract as ‘damages’.

What do I need to do?

Trying to determine whether the contracts you sign (or ask other people to sign) requires specialist legal skills and knowledge. If you regularly do business with small business, now is the time to get your contracts and templates reviewed to make sure that they comply with the new laws. This is exactly what we do! Contact us for a free, no obligation quote today to make sure your contract terms are fair. Call us on 1300 272 878 or email enquire@interpretcontracts.com.au for more information.