Australia: Important news for small business: New laws offer protection against unfair contracts


The landscape for small businesses in Australia is changing. Throughout 2016, those of you looking to the future will no doubt be planning ahead to ensure your business does not miss a beat – or an opportunity!

From 2017, small businesses will have the same protection against unfair contract terms that ordinary consumers currently enjoy.

At present, for small business owners, signing a contract is a confirmation and sometimes a celebration that you have won a job, or on the other hand, that someone has agreed to supply you with goods or services. It is not the result of a negotiated allocation of risks, as may be the case for larger businesses with the time and financial resources to engage in protracted contract negotiation. In fact, standard form contracts are often signed in circumstances where there has been little or no real opportunity at all to negotiate the terms.

Signing standard form contracts can and often does lead to small business owners agreeing to terms that can be unnecessarily onerous and in some cases can result in significant financial detriment.

That could be about to change.

The new laws

On 20 October 2015, the Federal Government passed the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015, which will extend the current unfair contract protections that consumers currently have, to small businesses. The protections extend to contracts for the supply of goods or services (which may include IT and telecommunications services, finance, motor vehicles, travel and utilities).

The laws will come into effect on 12 November 2016 and will apply to contracts where:

  1. at least one of the parties is a business which employs less than twenty people (not including casual employees, unless they are employed by the business on a regular and systematic basis); and
  2. either:
    1. or the value of the contract does not exceed $1,000,000 for contracts longer than one year.
    2. the value of the contract does not exceed $300,000 for contracts shorter than one year;

What is an unfair contract term?

An unfair contract term is one which:

  1. would cause significant imbalance to the parties' rights and obligations under the contract;
  2. is not reasonably necessary in order to protect a legitimate interests of the party who would be advantaged by the term; and
  3. would cause financial or other detriment to a party if it was relied upon.

Examples of unfair contract terms include terms that:

  1. allow one party (but not another party) to avoid or limit performance of the contract;
  2. allow one party (but not another party) to terminate the contract;
  3. allow one party (but not another party) to vary the terms of the contract;
  4. penalise one party (but not another party) for breach or termination of a contract; and
  5. limit one party's right to sue the other party.

What terms are not unfair?

Terms which define the main subject matter of the contract, or which set the upfront price payable under the contract, will not be unfair contract terms. Likewise, there are some terms that are expressly permitted by law that will not be found to be unfair.
Some contracts are excluded from the unfair contract terms laws, including shipping contracts, constitutions of companies and managed investment schemes and other kinds of bodies, and insurance contracts.

What happens to contracts before and after 12 November 2016?

The amendments will apply to a contract entered into after 12 November 2016.

If you have entered into a contract before 12 November 2016, and the contract is renewed, or a term of the contract is varied after 12 November 2016, the amendments apply to the contract from the date that it is renewed, or to the term as varied, and in relation to conduct after the date the contract is renewed or the term varied.

What if you think your contract includes an unfair term?

Only a court or a tribunal can determine whether a term is unfair. If a term is found to be unfair, it will be void i.e. it will not be binding. The rest of the terms in the contract will continue to be binding if they are capable of operating without the unfair term.
However, court proceedings are usually a last resort.

If you think your contract includes an unfair term, it is best to try and have the other party agree to remove it from the contract. If they do not, then you can approach the Australian Competition and Consumer Commission (ACCC) or the Australian Securities and Investment Commission (ASIC) who may assist you to resolve your dispute with the other party to the contract. The ACCC and ASIC can also make an application to the court (or in some cases a tribunal) to have a term declared unfair. If they do not decide to do that, you can do it yourself, however, we recommend seeking legal advice before commencing proceedings.

Likewise, if you use standard form contracts as part of your business processes and are concerned about the impact of the new laws, now is a good time to have those contracts reviewed.

For more information, please contact:

Marc Baddams, Partner
Phone: +61 2 9233 5544

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.

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