Protecting Small Businesses from Unfair Contract Terms

Protecting Small Businesses from Unfair Contract Terms

Are you a small business or is the party you trade with a small business; that is, an entity that employs fewer than 20 persons? If so, then you need to pay attention to the legal changes that will come into play on 12 November 2016.

The changes relate to the small businesses who trade on standard form contract terms; that is, contracts that are pre-prepared before any discussions relating to the transaction and where the terms are not usually negotiable. A clear example of a standard form contract is a credit application used by many of our clients for the provision of services or goods on credit terms.

Where your standard form contract (e.g. credit application) involves an upfront price payable of $300,000 or less, or has a duration of more than 12 months for an upfront prince payable of $1MIL or less, than you should review the terms of your contract before 12 November 2016 to ensure they are not unfair.

This is because by 12 November 2016, there will be changes to the ASIC Act and the Australian Consumer Law and those changes will state that if your contract is deemed unfair, then it will be treated as though the term never existed which means that you will not be able to rely on it in Court. This will obviously give a belligerent debtor customer scope to dispute their liability for monies owed to you. This could be critical for your cash flow as a small business.

So what does it mean for a term in a contract to be unfair? A term is unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contact; and
  • it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Some examples of terms that would be unfair are:

  • A term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent.
  • A term that limits, or has the effect of limiting, one party’s right to sue another party.
  • A term will be deemed unfair if it is a term that permits or has the effect of permitting one party to vary the upfront price payable in a contract without giving the other party an opportunity to terminate the contract.

If you think your contract terms may be caught by the changes outlined above, it is critical you have them reviewed before 12 November 2016, including the covering sheet to your contracts, such as the front cover of your credit applications.

A good set of terms and conditions that is enforceable forms the crucial backbone for successful trading relationships in any business.

If you would like to talk to a lawyer about whether the changes apply to you and have your contract terms reviewed, please contact Su-Ann Loh (Senior Associate, Dispute Resolution Practice Group) or Peter North (Senior Associate, Business Practice Group) on 03 9629 9629 or by email at suannl@lewisholdway.com.au and petern@lewisholdway.com.au.

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