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What are the New Unfair Contract Term Provisions for Small Businesses?

Sara-Jane Mok | October 11th, 2016

The unfair contract term provisions of the national Australian Consumer Law (ACL), which traditionally protect consumers in relation to terms of standard form contracts, have recently been extended to also protect small businesses.

 The ACL is the national law covering fair trading and consumer protection. From 12 November 2016, the unfair contract terms (UCT) provisions of the ACL were extended to smaller businesses, whereby certain contractual terms that are deemed to be unfair on that business can be rendered invalid and therefore unenforceable. If you are contracting with an individual or a small business, you should consider if any of your standard-form contracts need updating.

When do contracts fall under the extended UCT provisions?

The extended UCT provisions apply to ‘standard-form contracts’ entered into or renewed on or after 12 November 2016. If a contract was entered into before 12 November 2016, the extended UCT provisions will only apply to terms in the contract that have been changed or edited after 12 November 2016.

Do the New Unfair Contract Term Protections for Small Businesses Apply to You.jpeg

What is a standard form contract?

A standard form contract is not defined in the ACL. However, a standard form contract is typically a contract that has been prepared by one party to the contract before any discussion relating to the transaction occurred between the parties (such as a business’s standard terms and conditions).

An indicator that the UCT provisions may be applicable is when the other party to the contract, being an individual or small business, has little or no opportunity to negotiate the terms (i.e. the party that prepared the standard form contract has all or most of the bargaining power relating to the transaction).

The types of contracts covered include contracts that are:

  • for the supply of goods or services or the sale or grant of an interest in land;
  • at least one of the parties is a small business that employs less than 20 people, including casual staff employed on a regular and systematic basis (or an individual consumer);
  • the upfront price payable under the contract does not exceed $300,000, or $1,000,000 if the contract is for more than 12 months.

When is a term unfair?

A term is unfair when:

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

Examples of terms that may be considered unfair include terms that enable one party (but not another) to:

  • avoid or limit their obligations under the contract;
  • terminate the contract; or
  • vary the terms of the contract; or

that penalize one party (but not another) for breaching or terminating the contract.

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Certain contracts or terms are excluded from the UCT provisions and include:

  • constitutions of companies, managed investment schemes, or other kinds of bodies;
  • shipping contracts;
  • contracts of insurance;
  • a term that defines the main subject matter of the contract;
  • a term that sets the upfront price payable under the contract; or
  • a term that is required, or expressly permitted, by a law of the Commonwealth, a State or a Territory.

What if a term is found to be unfair?

If a term in a standard form contract covered by the UCT provisions is found by the courts or tribunals to be ‘unfair’, the term will be void and not binding upon the parties. However, the rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

How can we help?

If your business uses standard-form contracts or if you are a small business or individual bound by or have been offered standard-form contracts and think that this applies to you, we can assist with:

  • advice regarding the UCT provisions as it applies to your business;
  • preparing standard-form contracts in compliance with the UCT laws;
  • reviewing and revising your existing contracts to address any unfair terms; or
  • assisting you with communications and negotiations with your business suppliers and customers in relation to the UCT provisions.

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Sara-Jane Mok

Sara-Jane's experience encompasses a range of services such as property, commercial and intellectual property. Prior to joining mdp, Sara-Jane worked in Research & Development Tax at one of the ‘Big Four’ professional services firms assisting companies with preparing their Research & Development Tax Incentive claims.