Have you entered into an unfair contract?

Have you ever entered into a business contract which you think is unfair? Was it a standard form contract which offered plenty of protection for one party but not the other? Smaller businesses now have protection from unfair contracts under laws which were introduced on 12 November 2015.

Which contracts will the law apply to?

The laws will apply to standard form contracts (that is, where the terms and conditions are set by one party with no negotiation) entered into or renewed on or after 12 November 2016 where:

  • at least one of the businesses employs less than 20 people,
  • the price of the contract is no more than $300 000, or $1 million if the contract is for more than 12 months, and
  • the contract relates to the supply of goods or services (including financial goods or services), or the sale or grant of an interest in land.

It does not matter whether the smaller business is the customer or the supplier – the laws apply equally.

The ACCC, Australian Securities and Investments Commission, and state and territory offices of fair trading will enforce this law.

Which contracts will the law specifically NOT apply to?

The laws will not apply to the following types of contracts:

  • contract of marine salvage or towing
  • charterparty of a ship
  • contract for the carriage of goods by ship
  • constitution of a company, managed investment scheme or other kind of body
  • small business contract that is covered by Commonwealth, state or territory law that is prescribed by the regulations.

 How do I know if a contract is unfair? 

Ask yourself:

  • does the contract allow one business, but not the other, to change or cancel the contract, or to limit or avoid their obligations
  • does the contract penalise one business, but not the other, for breaching the contract?
  • are there terms within the contract that are not reasonably necessary to protect the stronger business?

If so, then it may be considered an unfair contract.

But we have plenty of standard form contracts which we give to all of our customers and suppliers!

We suggest that you:

  • know your customers/suppliers – so you know whether they fall within the definition of smaller business. Ask questions!
  •  review your contracts with smaller businesses as a matter of priority, so that you can ensure that your contracts are fair, and you avoid investigation by ACCC, ASIC and/or Fair Trading. If your contracts do contain terms that may be considered unfair, then consider how important the terms in that contract are to your business and whether the terms protect your legitimate business interests.
  • consider structuring the value of the contract so that you exceed the monetary threshold
  • consider developing a separate set of contracts for smaller business clients, and another set of contracts for other business clients – if you are in the transport industry, develop a separate set of contracts for shipping contracts (being an excluded contract).

The law will only apply to contracts entered into or renewed from 12 November 2016, so there is approximately 12 months for you to review and amend your standard form contracts if required.

What can we do if we believe that our small business has entered into an unfair contract?

Whilst having an unfair term in a contract is not an offence (meaning that no pecuniary penalties apply), the smaller business has the right to commence court proceedings against the other business to apply for orders that part of the contract is set aside (that is, declared void) or varied (that is, changed so that it is fair).

If the other business attempts to enforce the unfair term(s) against the smaller business, then the smaller business could seek compensation from the Court.

Of course, it is always our recommendation that if you believe that you have rights against another party, obtain legal advice first, then attempt to negotiate a resolution to the issue without rushing off to Court.

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