In brief: On 12 November 2016, new legislation
will come into force which will provide greater protection for
small businesses against unfair contract terms. This change has
been brought into play and will be governed by the Treasury
Legislation Amendment (Small Business and Unfair Contract Terms)
Act 2015 ("the Act").
What you need to know:
The new legislation affects contracts made on or after 12
November 2016, and existing contracts that are renewed after this
If you are a business which regularly provides standard
contracts to your clients/customers, you should review the terms
carefully prior to 12 November 2016. If you do not, you may find
yourself defending your contracts in Court.
The legislation introduces similar protections for small
businesses as is currently in place for consumer contracts.
Currently small business does not have this level of
Going forward: what contracts are covered?
Contracts will be covered under the new legislation if they are
standard form contracts involving a small business. A standard form
contract is not defined, but would include, for example, one where
a party has little or no opportunity to negotiate the terms of the
Examples of the types of standard form contracts likely to be
covered under the new legislation are:
Contracts for the supply of goods
Contracts for the supply of services such as:
Office fit-out services
Financial product contracts
Contracts for the lease of goods
What is classified as a small business?
The Act defines a small business contract as one where:
at the time the contract is entered into, at least one party to
the contract is a business that employs fewer than 20 persons;
either of the following applies:
the upfront price payable under the contract does not exceed
the contract has a duration of more than 12 months, and the
upfront price payable under the contract does not exceed
What clauses are likely to be considered unfair?
Each term is considered as part of the overall contract;
however, the following types of terms may be considered by a Court
to be unfair:
The right for one party to terminate the contract without cause
and without payment of compensation to the other party;
An automatic roll over of the contract in some
Large and excessive default fees; and
The right to unilaterally vary the contract without the option
for the other party to terminate the contract if they do not agree
to the variation.
What happens if a Court finds a term of a contract to be
If a Court finds a term of the contract to be unfair, it
Deem that term to be invalid;
Deem the entire contract to be invalid;
Vary the contract; and
Order loss and damages to be paid.
It is important that anyone with standard form contracts who
deal with small businesses, to review their contracts for potential
unfair terms prior to 12 November 2016. The failure to do so could
result in a claim by one of your clients/customers stating that a
term is unfair and could therefore result in an expensive Court
If you are unsure about the terms of your current contracts and
want to ensure they are compliant, do not hesitate to contact us
for legal advice to help avoid costly mistakes going forward.
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.Madgwicks is a member
of Meritas, one of the world's largest law firm
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