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Small Businesses – Unfair Terms in Standard Form Contracts

 

Big change for small business- Do your standard form business contracts contain
unfair terms?

From 12 November 2016 the Australian Competition & Consumer Commission (ACCC) will
be scrutinising standard form contracts involving small businesses (being a business
employing less than 20 people as determined on a headcount basis). New legislation
means small business contracts must not contain unfair terms. If there is an unfair term the
ACCC will be able to declare the term as void, which may impact the utility of other terms in
the contract. It may even cost the business its reputation or thousands of dollars by way of
compensation.

Surprisingly, the small business involved may be either the supplier or the acquirer, and
contracts between two small businesses are included under the new laws.

Standard form contracts are contracts that are not negotiated and occur in “take it or leave it”
circumstances, and would likely include the terms and conditions of a business.

Does this apply to my business?

To be affected by the new laws, the contract must satisfy all of the following categories:

  1.  At least one party must be a “small business” (this includes transactions between a
    large business and a small business, two small businesses, or with a non profit
    business);
  2. For contracts up to one year, the upfront price must be less than $300,000, or less
    than $1 million if the contract lasts longer than one year;
  3. The contract must be in relation to the supply of goods and services, financial transactions or services, or relating to land;
  4. The contract must be a “standard form contract”;
  5. It must not be an excluded contract (this currently includes but is not limited to contracts relating to marine and shipping transactions, company constitutions, and small business contracts that may already be covered by specified state or Commonwealth laws); and
  6. It must be entered into, varied or renewed on or after 12 November 2016 (e.g. this will affect transactions entered into under standard terms and conditions, or standard terms and conditions that are varied or renewed, on or after that date).

Contract terms that may be considered to be unfair include when only one party may have
rights in relation to terminating or varying the contract, or contracts where there is a
significant disparity in obligations required of the parties. Examples of unfair contract terms
include when a supplier is unilaterally able to vary the amount charged for a service without
providing the acquirer an opportunity to terminate the contract, or even terms containing
automatic rollover periods (e.g. month to month).

How do I minimise the risk of my contract containing unfair terms?

Businesses that believe they may be caught should take some of the following steps to limit
their exposure to potential liability:

  1. Insert mutual or balancing terms so that rights are afforded to both parties rather than only one party;
  2. Do not try to hide terms. Specify or draw attention to any terms which may fall into the category of being unfair or one sided, and ensure that they are justifiable;
  3. Take steps to increase the transparency of payment and/or cancellation procedures within contracts. This can include anything from improving the layout, spacing, font size and colour of the terms, to the actual wording of clauses (avoid being wordy and convoluted);
  4. Allow negotiation and agree to changes of the terms of a standard form contract before it is entered into; and
  5. Include provisions for opting out and/or dispute resolution as these are simple ways to ensure that terms of standard form contracts will not be considered as unfair. Penalties/Effects

The risk is that businesses may have certain terms of contracts declared void by the courts,
which will potentially impact how other aspects of the contract will continue to operate. This
can cause considerable damage to businesses’ reputation, relationships and revenue if a
number of your standard form contracts are affected at once, which will usually be the case.

Additionally, ASIC and ACCC may choose to publish the details of your matter on their
website or require you to give an undertaking to prevent future unfair conduct. If required,
these bodies may also award compensation orders to aggrieved parties at their discretion.

If you use standard terms and conditions in your business relationships, or have any
questions regarding the validity of your terms, please contact our commercial business team.

Author – Suzana Khan