Unfair Contract Terms Extended

On 20 October 2015, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 was passed by the Federal Government to extend the unfair contract term protections to small businesses.  The new laws will come into effect from 12 November 2016 which gives businesses one year to review and amend their standard form contracts (i.e. a pre-prepared Contract where the other party has no opportunity to negotiate) in order to comply with the new legislation.

Previously, the legislation captured contracts of higher valuer.  The new reforms however will increase the coverage of the unfair contract terms legislation from approximately 80% of small businesses to 95% of small businesses.

The new allows allow unfair contract terms to be declared void. This means that those terms declared void will be unenforceable and will operate as if it didn’t exist in the Contract.  The Contract will only continue to bind the parties if it can operate without the unfair term.  For that reason, it is important for businesses which may be subject to these new laws to review their standard form contracts prior to 12 November 2016.

What Contracts are covered by the reforms?

The new laws will apply to a standard form Contract entered into or renewed on or after 12 November 2016 (or any variations made after 12 November 2016), where:-

1. It is for the supply of goods or services or the sale or grant of an interest in land;
2. At least one party is a business that employs less than 20 people (including casual employees employed on a regular or systematic basis);
3. The upfront price payable (total consideration payable) under the Contract is $300,000.00 or less or $1,000,000.00 or less if the Contract is for more than twelve (12) months. This will not include amounts which are conditional or cannot be calculated or capable of disclosure. For example, early termination fees, late payment fees etc;
4. It is not an excluded contract, meaning that it is not:-
   1. A contract entered into before 12 November 2016
   2. A contract of marine salvage or towage;
   3. Insurance contracts;
   4. Charterparty of a ship;
   5. Contract for the carriage of goods by a ship;
   6. Constitution of a company, managed investment scheme or other kind of body;
   7. Small business contract that is covered by Commonwealth, state or territory law that is prescribed by the regulations.

What terms will be considered unfair?

Whilst ultimately a Court or Tribunal will decide whether a term is unfair there are a number of examples provided by the law including:-

1. Terms that enable one party (but not another) to avoid or limit their obligations under the Contract;
2. Terms that enable one party (but not another) to terminate the Contract;
3. Terms that penalise one party (but not another) for breaching or terminating the Contract;
4. Terms that enable one party (but not another) to assign the Contract without consent or vary the terms of the Contract.

What should you do now?

Whilst there is no penalty for including an unfair contract term in a Contract, there are consequences if a person attempts to enforce a provision of a contract that is declared void. For example, compensation could potentially be awarded to a party affected by the unfair term.

It is important to review and amend, if necessary, your standard form Contract by 12 November 2016.

We would recommend that our clients review any existing lower value standard form contracts (e.g. contracts with suppliers, customers or independent contractors) used in transactions involving businesses that employ less than twenty (20) persons.

If you are uncertain as to whether your standard form Contract breaches the unfair contract protections, please contact our office.