On November 12 last year a change to the law was made to protect small businesses from unfair terms in standard contracts .
It applies to standard form contracts and small business contracts which are entered into or renewed on or after 12 November 2016, where:
• It is for the supply of goods or services or the sale or grant of an interest in land;
• At least one of the parties to the contract is a small business (meaning it has twenty (20) employees or less); and
• The upfront price payable under the contract is no more than $300,000.
If you are a small business owner that purchases goods or services from large enterprises or supplies goods or services to other small businesses then this article is relevant to you, say Marsdens partners Justin Thornton and Rahul Lachman, both of whom are business law accredited specialists.
So what is a standard form contract?
A standard form contract is one that has been prepared by only one party to the contract and is made in circumstances where the other party has little or no opportunity to negotiate the terms.
These types of contracts are usually offered to consumers and small businesses on a “take it or leave it’’ basis, often by companies in industries such as telecommunications and finance.
What terms are considered unfair?
A term is considered unfair if:
• it causes a significant imbalance in the rights and obligations of a party;
• it is not reasonably necessary to protect the legitimate interests of the advantaged party; and
• it causes a financial detriment to a party if relied upon.
The Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) have advised that contract terms may be considered unfair where they:
• provide the advantaged party with a right to unilaterally vary an important term of the contract (e.g. by increasing the costs under the contract) without giving notice to the other party.
• impose an early termination fee if a party wishes to terminate the contract;
• provide limited or no liability for one party but not the other party;
• allow a party to automatically renew a contract without consent from the other party;
• allow a party to terminate a contract without any cause;
• require a party to pay liquidated damages in unreasonable circumstances;
• grant wide indemnities which are not reasonably necessary to protect the interests of the advantaged party; and
• require a party to forfeit its deposit if it wishes to terminate a contract, even where this is due to the other party not meeting its obligations under the contract.
If you require advice in relation to the terms of a standard form contract (particularly if you think they are unfair) or would like a contract prepared in a way which ensures it is enforceable under the Act, contact Justin Thornton at jthornton@marsdens.net.au or Rahul Lachman at rlachman@marsdens.net.au or phone 4626 5077.
