Under the Federal Parliament's proposed legislation,
suppliers will need to be careful that they do not significantly
limit the rights of small businesses and avoid including
unnecessary terms in their standard form contracts.
Small business contracts may be void if courts find a term
On 14 September 2015, the Senate passed legislation extending
the existing consumer protections for unfair contract terms in
standard form contracts to small businesses.
If the proposed legislation is agreed to by the House of
Representatives, these amendments will come into force 12 months
from the day the legislation receives Royal Assent. The amendments
will apply to "small business contracts" entered into
after the commencement of the legislation, as well as small
business contracts renewed or varied after this date.
The effect of a term of a "small business contract"
being declared unfair is that a court may order that all or part of
the contract is void.
"Small business contract" is a standard form contract
within specified limits
The proposed legislation provides that a "small business
contract" is a standard form contract for the supply of goods
or services, or the sale or grant of an interest in land where:
the upfront price does not exceed $300,000 if the contract is
under a year or $1,000,000 if the contract's duration is more
than 12 months
at the time the contract is entered into, at least one party to
the contract is a business that employs less than 20 persons
A standard form contract is a pre-prepared contract that is
presented to customers on a "take-it-or-leave-it" basis.
The party offering the contract generally has the most bargaining
power in the transaction.
In determining whether the 20 person limit has been exceeded,
full-time, part-time and casual employees who work on a regular and
systematic basis regardless of an employee's hours or workload
Unfairness test aims to redress imbalance between parties
A term of a consumer contract is unfair if:
it would cause a significant imbalance in the rights and
obligations of the parties under the contract
it is not reasonably necessary to protect the legitimate
interests of the party advantaged by the term
it would cause detriment to a party if it is applied or relied
Examples of terms that may be declared unfair include if the
permits one party, but not another party, to avoid or limit its
performance of its obligations under the contract
penalises one party, but not the other party, for a breach or
termination of the contract
permits one party, but not another party, to terminate, vary or
renew the contract
permits one party to vary the upfront price under the contract
without the right of the other party to terminate the contract
permits one party to unilaterally vary the characteristics of
the goods or services to be supplied, or the interest in land to be
sold or granted, or the financial goods or services to be supplied
under the contract
permits one party to unilaterally determine whether the
contract has been breached or interpret its meaning
limits one party's vicarious liability for its agents
permits one party to assign the contract to the detriment of
the other party without that party's consent
limits one party's right to sue the other party, the
evidence on party may adduce in proceedings or imposes the
evidential burden on one party for proceedings
Exemptions for some terms and types of contracts
A term that defines the main subject matter of the contract,
sets up the upfront price of the contract or is required by law is
exempt from being declared unfair under these protections.
The legislation also provides that certain shipping contracts,
contracts that are constitutions of companies, managed investment
schemes or other kinds of bodies and contracts covered by the Insurance Contracts Act 1984 (Cth) are exempt.
Review standard form contracts against these amendments
Suppliers that use standard form contracts to contract with
customers will need to be careful and ensure that they do not
significantly limit the rights of small businesses. This includes
making sure that their standard form contracts do not include terms
that are not necessary to protect their legitimate interests or
terms that, if relied on, would cause detriment to the small
To reduce the risk of legal action from small businesses,
parties using these types of contracts should have their contracts
reviewed in light of these amendments.
Do not depart from the contract terms, or encourage the other party to do so, unless you plan to alter the contract.
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