On 12 November 2016, a new law came into effect, which protects small businesses from unfair terms in business-to-business standard form contracts.
Setting the scene
ACCC Deputy Chair, Dr Michael Schaper says that small businesses sign an average of eight standard form contracts a year [with a much larger company] and often these are offered on a ‘take-it or leave basis’, which can be unfair. This is the crux of the problem – it leaves small businesses with no choice but to accept the terms, having no luxury to ‘leave it’, and are obliged to ‘take it’ with all its shortcomings.
Research has shown that two thirds of small businesses claim to have experienced unfairness in contract terms they have agreed to, along with almost half reporting that they experienced some hardship as a result.
This is where this law comes into play.
It provides a level of protection to restore some of the balance to the bargaining process. Dr Michael Schaper also observed that this positive engagement with the ACCC over the last year has seen huge businesses like Australia Post, News Limited and Optus amend or remove contract terms that may have been problematic in complying with the new law.
Considering small businesses are particularly vulnerable to this exploitation, it’s worthwhile carefully reviewing every contract before agreeing to anything. You might be able to bargain for more than you initially expected. To get the most out of your contract, LawPath has networks of expert business lawyers who can help review any terms of a contract so that you can play the big companies at their own game.
Explaining the elements
Before you rip the contract up or slam down the door of a major corporation, know where and when this law applies and what the associated terminology means.
What is a standard form contract?
Standard form contracts are usually prepared by one party to the contract, where the other party has little or no opportunity to negotiate the terms. These are offered on a ‘take-it or leave-it’ basis.
For the purposes of this law, a court or tribunal will take into account any matters it considers relevant. It must take into account the bargaining power of each party, whether there were any opportunities to negotiate the terms of the contract, and along with some other important indicators.
What is a small business contract?
This protection is only offered to small business contracts. To qualify as a ‘small business contract’, it must be a standard form contract entered into or renewed on or after 12 November 2016 where:
- It is for the supply of goods/services or sale/grant of an interest in land;
- At minimum, one of the parties is a small business (employing less than 20 people, including casuals who work on a regular and systematic basis); and
- 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.
If the contract in question has been varied on or after 12 November 2016, the law applies to only the varied terms.
What is an unfair term?
Lastly, there must be terms in the contract that could be considered unfair. An unfair term must create an imbalance in rights and obligations, cause detriment to a small business and not be reasonably necessary to protect the interests of the party advantaged by the term. For example, if a term only enables one party (but not the other) to terminate the contract, or only penalises one party (and not the other) for breaching/terminating the contract.
Ultimately only a court can decide whether a term is unfair. It can also consider a range of other relevant matters.
Standard form contracts are cost-effective and efficient for businesses entering into general agreements. The legislative changes affect larger businesses just as much as smaller businesses.
If a court declares that a business has taken advantage of unfair terms, then those terms will be void and unenforceable. The rest of the contract will continue to be binding where it is capable of operating without the unfair term. This will undoubtedly be significantly detrimental to larger businesses. Equally, smaller businesses must be aware of these new protections so they are not exploited.
Get in touch with LawPath’s range of business lawyers if you think your business contract contains unfair terms. Receiving legal advice from experts will give your business the extra advantage when dealing with contracts.
Contact a LawPath consultant on 1800 LAWPATH to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 600+ expert lawyers or to get answers to your legal questions.