27/11/2015

Recent legislation now extends the protection afforded against unfair contract terms to small business contracts.

With last minute changes to cover contracts of higher value, it is believed that 95% of contracts with small businesses will be subject to the new laws.

If a contract term is found to be unfair the contract can only remain binding if it can operate without the unfair term.

The legislation will apply in addition to any existing industry regulatory codes, such as the Franchising Code of Conduct.

What is a small business? One that employs less than 20 people.  A simple head count will  be necessary and no account is made for hours, workload or responsibility.  Casuals are included if they are regularly or systematically employed.

What is a small business contract? One where:
(a)    the upfront price payable is $300,000 or less provided that if it goes for more than a year then $1,000,000 or less (including up-front fees but not contingent fees), and
(b)    in general the contract is a standard form contract (ie a pre-prepared contract that is not generally negotiated) for the supply of goods or services or grant of an interest in land.

What is an unfair term? One which:
(i)    causes significant imbalance in the parties’ rights and obligations
(ii)    is not reasonably necessary to protect the legitimate interest of the benefited party, and
(iii)    causes detriment (financial or otherwise) to the other party.

Excluded are terms which:
(A)    set the price
(B)    cover the main subject matter of the contract, or
(C)    are required by law.

Generally, the Court is required to look at the term against the backdrop of the contract as a whole.

Terms likely to be caught by the new law are those that permit only one party to:
•    get out of the contract or some part of it;
•    limit that party’s liability;
•    change or terminate the contract;
•    renew or not renew the contract;
•    vary the price or what is to be supplied (with no comeback by the other party);
•    assign the contract without consent;
•    impose an evidentiary burden on the other party;
•    limit the other party's right to sue or produce evidence;
•    determine unilaterally if a breach has occurred; or
•    impose a penalty for a breach or termination.

Parties accused of relying on unfair terms will need to show that the term dealt with a legitimate business need and that a reasonable balance had been reached with the other party. Drafting clauses so that they are clear and transparent should help a bit.

What to do now? The new law comes into effect 12 months after it receives royal assent. Businesses now have a one year grace period to review and amend their standard form contracts in order to comply.

Importantly, the new regime will apply to existing contracts if they are renewed from here on or will apply to a particular term of the contract where that term is varied from here on.

Businesses with standard contracts should conduct a legal risk review on those existing standard form contracts in order to establish:
•    are there any contracts that fit the eligibility criteria under the new law?
•    if so, are there any terms that could be ‘unfair’ under the new law?
•    can the business document the rationale (ie the legitimate business need) for such potentially unfair terms (for example, ensuring consistency of approach that permits easier and cheaper contract administration across a network etc)?
•    can the terms be justified on the basis that they are no more than is reasonably necessary?

If you would like us to do an audit on your standard contract terms call, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.