What directors need to know about changes to unfair contract terms

Tuesday, 08 November 2016

Michael Schaper FAICD photo
Michael Schaper FAICD
Deputy Chair, Australian Competition and Consumer Commission

    New laws come into place this month which will allow courts to crack down on unfair contract terms for small businesses. ACCC Deputy Chair Dr Michael Schaper FAICD explains what directors need to know about the changes.

    Know your rights: unfair contract terms & small business2:01

    New laws coming into force this month allow the courts to strike out unfair terms in standard form small business contracts. The protections are potentially far reaching when you consider there are more than two million small firms operating in Australia, and the average small business enters into about eight standard form contracts a year.

    ‘Take it or leave it’

    Many small traders entering into agreements with larger businesses have no option but to accept all the conditions of standard form contracts. This might include non-negotiable arrangements for things such as advertising, financial services or utilities. Contracts offered on a ‘take it or leave it’ basis also feature in franchising, retail leasing, and independent contracting.

    Lop-sided terms

    Standard form agreements are a cost-effective way of doing business, but they can contain one-sided terms. A Treasury survey found around 60 per cent of small businesses claimed to have experienced unfairness in contract terms and almost half said they experienced harm as a result. The law, which already applies to business-to-consumer contracts, ensures contract terms are not stacked against smaller firms who often lack the time and legal expertise to review contracts thoroughly.

    The contract

    The change to the law is significant for both small firms and the larger enterprises who offer them standard form contracts. It covers standard form agreements between businesses where one of the firms employs less than 20 people and the contract is worth up to $300,000 in a single year (or $1 million if the contract runs for more than a year). The law will apply to a contract entered into or renewed on or after 12 November 2016, and operates on the presumption that every contract is a standard form one unless it can be shown otherwise. If you vary a contract on or after this date, the law will apply to the varied terms.

    Examples of unfair terms

    A term may be unfair if it causes significant imbalance, is not necessary to protect the legitimate interests of the party advantaged by the term, and would cause harm to the other party if it were relied on. Some contract terms that may be unfair include:

    • clauses that enable one party (but not another) to avoid or limit their obligations under the contract;

    • terms that enable one party (but not another) to terminate the contract;

    • agreements that penalise one party (but not another) for breaching or terminating the contract;

    • clauses that enable one party (but not another) to vary the terms of the contract.

    However, one issue that can’t be contested is the price payable under a contract. For example, small businesses can’t ask to have a contract voided because they now believe the price they’re paying for a particular good or service is higher than it should be.

    Who decides?

    Only a court can decide if a particular term in a contract is unfair. If it does so, then that clause will be void and treated as if it never existed. However, the rest of the contract will remain in effect to the extent it is capable of operating without the unfair term. In deciding if a contract term is unfair, the judge may consider whether the term is clear and written in plain language. The judge will also assess the term in light of the whole contract, as there may be counterbalancing terms that limit ‘unfairness’.

    Role of regulators

    Responsibility of the unfair contract terms laws is shared between the ACCC, ASIC and the state and territory consumer protection agencies. The ACCC and state and territory agencies can provide general information on the law as it applies to franchising and everyday goods and services. The ASIC can provide information about the unfair contract terms law as it applies to financial products and services.

    Good governance

    While company directors will not be personally or jointly liable for an unfair contract, good governance suggests that they should ask some pertinent questions of management. For example:

    • What contracts does our organisation have with small businesses?

    • Have these been assessed for potential unfair clauses?

    • What steps is management taking to replace unfair terms with more equitable, workable clauses?

    • Will these be in place by the start date of the new law on 12 November?

    For more information about your rights and obligations visit www.accc.gov.au/uct

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