Unfair Contract Terms – A Change Is Coming

The unfair contracts legislation is being amended with effect from 12 November 2016 to apply to small businesses in addition to individuals.

What is the current law?

Unfair contract terms are regulated under the Australian Consumer Law – Competition and Consumer Act 2010 (Cth) Schedule 2 (CCA). Section 23 of the CCA states that any term of a relevant contract will be void if the term is unfair.  The current law applies to individuals entering into contracts.  For the purpose of the laws, the relevant contracts are standard form contracts and consumer contracts. These include a contract for the supply of goods or services, or the sale or grant of an interest in land.

The test for what will be unfair, is found under section 24 of CCA which states that a term will be unfair if it:

(a) would causes a significant imbalance in the parties’ rights and obligations arising under the contract; and

(b) is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and

(c) would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The CCA outlines a number of examples that illustrate where a term will be considered unfair. These include, a term that permits, or has the effect of permitting, one party (but not another party) to:

(a) avoid or limit performance of or obligations under the contract;

(b) terminate the contract; or

(c) be penalised for breaching the contract;

(d) vary the terms of the contract.

Other matters such as, the extent to which the term is transparent, or considering the contract as a whole may also be considered in deciding unfairness.  The contract will continue to bind the parties if it is capable of operating without the unfair term.

What is the amendment?

Effective from 12 November 2016, the application of the unfair contract laws will be extended to include small businesses.  This is occurring by way of the introduction of a new term in the legislation, namely the small business contract, so that any term of a small business contract is void if the term is unfair and the contract is a standard form contract

The amendment provides that a contract is a small business contract if:

(a) the contract is for a supply of goods or services, or a sale or grant of an interest in land; and

(b) at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and

(c) either of the following applies:

(i) the upfront price payable under the contract does not exceed $300,000; or

(ii) the contract has a duration of more than 12 months and the upfront amount payable under the contract does not exceed $1,000,000.

What does this mean for me and my contracts?

If you are a business that employs fewer than 20 people, or contract with a business that employs fewer than 20 people, the new legislation will apply to any of your contracts that fit the description above – that is, where it is a standard form contract and it contains an unfair term.

In establishing whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, including:

(a) whether one of the parties has all or most of the bargaining power relating to the transaction; and

(b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties.

It should be noted that in addition to the new small business contract, the law will continue to apply to individuals in relation to consumer contracts.

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