From 12 November 2016, a new law will protect small businesses from unfair terms in standard form of contracts.
The law will apply to a standard form contract entered into or renewed on or after 12 November 2016, where:
- It is the supply of goods or services or the grant of an interest in land.
- At least one of the parties is a small business (employs less than 20 people including casual employees employed on a regular and systemic basis).
- The upfront price payable under the contract is no more than $300,000, or $1m if the contract is for more than 12 months.
The new law will also apply to contracts varied on or after 12 November 2016.
A standard form contract is one that has been prepared by one party to the contract, where the other party has no opportunity, or little opportunity to negotiate the terms.
The law gives examples of terms that might be unfair including terms that give one party but not the other party rights to avoid or limit liability or to terminate or vary the contract. However only a Court or a tribunal can decide if a term is unfair.
The terms that set the upfront price payable under the contract are not covered by the law.
If a Court or tribunal determines that a term is "unfair", the term will be void – that is not binding on the parties. The rest of the contract which is not found to be "unfair" will still apply to the extent it is capable of operating without the unfair term.
Some terms that can't be declared unfair include terms that define the main subject matter of the contract, which set the upfront price, or which are permitted under a law of the Commonwealth or a state (e.g. a prescribed industry code).
If a contract is varied on or after 12 November 2016, the protections will apply to the varied terms but not to the rest of the contract.
If a contract is automatically rolled over after 12 November 2016, the protections will apply from the renewal date.
If a contract is holding over say on a month to month basis or on another periodic basis or moves from a set term to holding over, the new protections apply from the first time a new period starts on or after 12 November 2016.
The new provisions also apply to contracts with a Commonwealth, state or territory body to the extent it is carrying on a business but not a government body that engages in day to day procurement activities which is not carrying on a business.
Where a contract is made up of multiple documents – e.g. another document incorporated by reference, the other document will form part of the contract for the purposes of the new law.
Where there is a breach, a number of options may be available including having the ACCC or ASIC intervene (likely in only the most significant cases), self enforcement, or to seek to involve the applicable industry ombudsman and dispute resolution processes.
Businesses who deal with small businesses will be well advised to have their contracts reviewed well ahead of the new law starting, and to cover contracts being signed now that might be renewed under the new law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
