Spotlight on unfair contracts and small businesses

The unfair contracts regime under the Australian Consumer Law was extended to apply to small businesses on and from 12 November 2016 and is already in force. It covers contracts for supply of goods or services or for the sale or grant of an interest in land.

The changes apply to new contracts, together with existing contracts that are extended, renewed or varied.

Here we provide you with a good starting point for your contract reviews irrespective of whether or not you prepared the contract or whether the other party provided the contract to you to sign.

You may have an unfair contract if you have a standard form contract with a small business and your contract contains an unfair term.

1. Is my contract a standard form contract?

There are a number of factors that are taken into consideration to determine whether a contract is a standard form contract including:

Bargaining power of the parties to the contract* (one party has most of the bargaining power or all of it);
If the contract was “tailored” following discussions with the other party or prepared prior to any such discussions*;
Whether the contract is presented as “take it or leave it” or similar*;
Whether the contract was negotiated (or up for negotiation)* or in fact, presented as non-negotiable;
Whether the contract terms account for the specific nature/characteristics of the party or the subject matter*;
Whether the contract is routinely issued out in the same or similar format.

There is a presumption that a contract is a standard form. The business relying on the contract has the onus of proof to prove otherwise.

The items marked * above are relevant matters the court must take into account.

2. Is my contract a small business contract?

One party must be a small business – employing less than 20 employees including casuals that are employed on regular and systematic basis.

The upfront price payable under the contract must be under the threshold:

Less than $300,000 if the contract duration is 12 months or less;
$1 million or less if the contract duration is over twelve months.

3. Does my contract contain an unfair term?

The unfair contract terms do not apply to parts of the contract that:

Define the main subject matter (the goods or services relevant to the contract);
Set the upfront price payable (so long as that price is disclosed before the contract is entered into); and
Are required or permitted by law.

Parts of the contract specifically negotiated between the parties are less likely to be found to be unfair terms.

A contract term will be unfair if (considering the clause and the contract as a whole):

It causes significant imbalance in the parties’ rights and obligations (the court carries out a factual assessment of the available evidence);
The term is not reasonably necessary to protect the legitimate interests of the party who seeks to rely on the term;
The term would cause detriment (whether financial or otherwise) to the other party if the term was effective.

4. What happens if my contract term is unfair?

If the court finds your contract term unfair, the term will be voided (struck out of the contract, as if it had never been in the contract to begin with). The rest of the contract continues to apply to the parties.

However consider the practical ramifications and impact on the relationship of the parties if the parties have disputed the fairness of the contract terms and embarked on a formal resolution process in respect of that issue.

Where a court finds a term unfair there can also be a range of court remedies imposed including:

Injunction effectively preventing the other party from enforcing the term;
Compensation order in favour of the aggrieved party;
Non-redress orders.

Consider also the practical impacts on your time, resources, energy in pursuing or defending an unfair contract claim, not to mention the cost. Your reputation could also be affected.

5. Where can I find further resources on unfair contracts extending to small businesses?

This article is one of two written in regards to unfair contracts and small businesses. Here you can read part two: Unfair contract terms and small businesses: Examples and practical considerations.