Contracts for small businesses
Small business contracts are usually written as standard form contracts. This means they are prepared by one party, without negotiation and are served on a “take it or leave it” basis. Small businesses usually operate on this basis for financial services or products as it allows everyday business to operate efficiently. However these contracts can lend themselves to unfair terms if they go unchecked.
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Australian Consumer Law
In November 2016 the Australian Consumer Law added extra provisions to protect small businesses from unfair contract terms. Overall, if a term in a standard form contract is found unfair by a court, then that clause is void. If this is the case the small business no longer needs to comply with the clause.
The law will apply to small business to business contracts if:
- At least one of the parties is a ‘small business’ (i.e. employs less than 20 people, including casual employees employed on a regular and systematic basis)
- 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
- It is for the supply of goods or services or the sale or grant of an interest in land
What is an unfair term?
A term in a contract is unfair under the new Australian Consumer Laws if:
- It creates significant imbalance in the parties’ rights and obligations under the contract
- Not be reasonably necessary to protect the legitimate interests of the party advantaged by the term, and
- It causes detriment (financial or otherwise) to a small business if it were to be applied or relied upon
These clauses usually give the dominant party an unfair range of power and are biased by nature. It’s hard to spot these terms as well as think ahead about the repercussions they may have on your business. Below are some examples of what to look out for.
Right to alter a contract unilaterally
A small business enters into a contract for a loan. The lender has a term within the contract which allows them to alter any clause in contract in unspecified ways. This could include altering fees and interest rates without limitations set. Also the small business does not have the right to end the contract even if the lender increases the fees.
Evidently there is an imbalance of rights within this clause and consequently it can be used to cause financial detriment. It would ultimately be up to the court to decide if this is fair. However recognising these terms is an important skill as a business owner. This could allow you to bring this up with your lender or go seek advice from a lawyer.
Automatic rollover
A small business leases a product, for a fixed period from a leasing company. After the fixed lease period ends, unless the business purchases or returns the goods, the small business is automatically entered into another fixed term lease. To exit this new lease agreement a cancellation fee is required.
This is an example of an unfair term as it allows the leasing company to start a new lease agreement without consent. Again it’ll be up to the court to decide what is considered unfair or fair.
Options for small businesses
It is worth noting that court procedures can be lengthy and costly to small businesses. Therefore it is critical to be able to spot unfair terms pre-contractually and attempt to negotiate amendments. That’s why talking to a business lawyer and getting a second opinion on your contract before signing is a good idea. This will allow you to propose amendments before signing and get clauses clarified and explained clearly. A lawyer can help you negotiate and even redraft proposals for clauses.
Also keep in mind, the ACCC also seeks to enforce and act on reported cases of unfair terms to small businesses. They can even bring when deemed appropriate some cases before the court. Therefore it isn’t a bad idea to contact them if you believe you have been a victim of an unfair term in a contract.
Furthermore, if you think a financial service provider has used or relied on an unfair contract term you can lodge a complaint with ASIC for investigation.
Conclusion
Although there are a lot of channels that can protect you from unfair terms, there is still great value in getting legal advice from a business lawyer before signing anything. This can save yourself and your business a lot of time, as well as make sure you start on the right path in your business dealings.
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