Unfair Terms in Small Business Contracts

Posted on Posted in Legal Issues In Small Business

If you are the owner of a small business, please contact Allied Legal prior to entering into your next contract.  Alternatively, if your business (whether large or small) uses standard form contracts to operate, please also consider contacting Allied Legal.  This is because, as of 12 November 2016, small businesses are protected from unfair terms in standard form business to business contracts.

Is your business a “small business” for purposes of the law?

The law applies to standard form contracts where:

  1. at least one of the parties is a small business (employs less than 20 people, including casual employees employed on a regular and systematic basis);
  2. it is for the supply of goods or services or the sale or grant of an interest in land; and
  3. the upfront price payable under the contract is no more than $300,000 or $1 million if the contract is for more than 12 months.

What is a standard form contract?

A standard form contract is one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms.  The contract is usually offered on a “take it or leave it” basis without the opportunity for negotiation.

The following factors indicate that a standard form contract exists:

  1. Bargaining power: one party possesses the bargaining power;
  2. No negotiation: the contract is prepared without discussion between the parties;
  3. No choice: the other party must accept or reject terms on a “take it or leave it basis” and/or the other party is not given an effective opportunity to negotiate the terms of the contract.

A contract is less likely to be regarded as a standard form contract if the contract is prepared following engagement between the parties.  Where parties are given the opportunity to negotiate the terms of the contract it is less likely to be considered “standard form”.

Online terms and conditions, banking terms, insurance agreements, license agreements and mobile phone plans are just some examples of what may be regarded as standard form contracts.

Practical tip: Franchisors and lessors, in particular, should take note not to be too heavy handed in their negotiations as this could result in the counterparty being able to argue that they have entered into a standard form franchise agreement or lease agreement with unfair terms.

What is the effect of having an unfair contract term?

If a court or tribunal finds that a term is “unfair”, the term will be void and not enforceable.  However, the rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

If a court declares that a term is unfair, and a party seeks to apply or rely on the unfair term, the court may grant remedies including:

  1. an injunction preventing the party from acting upon the term;
  2. redress orders; and/or
  3. any other orders that the court considers appropriate.

Broadly speaking, an unfair term in a contract is one which:

  1. causes a material imbalance in the parties’ rights and obligations;
  2. is not reasonably necessary to protect the legitimate interests of the party benefiting from the term, and
  3. would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.

By way of example, a term which allows one party to terminate the contract, but not the other, may be deemed unfair.  Similarly, a term which allows one party to vary the terms of the contract unilaterally may also be deemed unfair.

Conclusion 

In light of the above, it makes commercial sense for small businesses to engage a lawyer when entering into contracts to ensure their rights are adequately protected.  Parties who seek to negotiate a contract on the basis that it is a “standard form” and therefore not subject to negotiation or change, may be overstepping the mark as far as the new laws are concerned.

Similarly, larger business should seek advice to ensure that their standard form contracts do not contravene the legislation.  Allied Legal would be happy to assist with the review of your existing standard form contracts. We can assist you to determine which business structure is best for you too.

Please contact Allied Legal at info@alliedlegal.com.au for a free consultation.