In brief

On 12 November 2016, new legislation will come into force which will provide greater protection for small businesses against unfair contract terms. This change has been brought into play and will be governed by the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (“the Act”).

What you need to know

  • The new legislation affects contracts made on or after 12 November 2016, and existing contracts that are renewed after this date; and
  •  If you are a business which regularly provides standard contracts to your clients/customers, you should review the terms carefully prior to 12 November 2016. If you do not, you may find yourself defending your contracts in Court.

Background

The legislation introduces similar protections for small businesses as is currently in place for consumer contracts. Currently small business does not have this level of protection.

Going forward: what contracts are covered?

Contracts will be covered under the new legislation if they are standard form contracts involving a small business. A standard form contract is not defined, but would include, for example, one where a party has little or no opportunity to negotiate the terms of the contract.

Examples of the types of standard form contracts likely to be covered under the new legislation are:

  • Contracts for the supply of goods
  • Contracts for the supply of services such as:
    • Financial services
    • Accounting services
    • IT services
    • Cleaning services
    • Office fit-out services
  • Financial product contracts
  • Franchise agreements
  • Internet/telephone contracts
  • Contracts for the lease of goods

What is classified as a small business?

The Act defines a small business contract as one where:

a)    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

b)    either of the following applies:

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

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

What clauses are likely to be considered unfair?

Each term is considered as part of the overall contract; however, the following types of terms may be considered by a Court to be unfair:

  • The right for one party to terminate the contract without cause and without payment of compensation to the other party;
  • An automatic roll over of the contract in some circumstances;
  • Large and excessive default fees; and
  • The right to unilaterally vary the contract without the option for the other party to terminate the contract if they do not agree to the variation.

What happens if a Court finds a term of a contract to be unfair?

If a Court finds a term of the contract to be unfair, it may:

  • Deem that term to be invalid;
  • Deem the entire contract to be invalid;
  • Vary the contract; and
  • Order loss and damages to be paid.

Conclusion

It is important that anyone with standard form contracts who deal with small businesses, to review their contracts for potential unfair terms prior to 12 November 2016. The failure to do so could result in a claim by one of your clients/customers stating that a term is unfair and could therefore result in an expensive Court case.

If you are unsure about the terms of your current contracts and want to ensure they are compliant, do not hesitate to contact us for legal advice to help avoid costly mistakes going forward.

About the Author

Catherine Ballantyne

Partner
A business disputes specialist, Catherine is a trusted advisor to businesses and individuals in obtaining successful outcomes. Businesses rely on Catherine as a trusted advisor as well as lawyer in guiding them through complex litigation and disputes.

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