Big win for small businesses: Unfair contract terms

Since 12 November 2016, laws have been in place to protect small businesses from unfair terms across Australia.

Since 12 November 2016, laws have been in place to protect small businesses from unfair terms across Australia.

Before the laws came into effect, small businesses were often offered standard form contracts on a “take it or leave it” basis. These contracts were used for a wide range of transactions. Due to an imbalance of bargaining power or commercial size, small businesses had little scope to negotiate the terms in these contracts and did not have the time or resources available to critically review them.

The effect was that small businesses were left vulnerable as they had little option but to sign up to contracts with unfair provisions, causing detriment to themselves, the broader economy and, as a result, throughout the community.

Unfair contracts

In a step to ensure the protection of small businesses in Australia, the government committed to extending the protection of small businesses entering into “standard form” contracts.

Prior to 12 November 2016, Australian Consumer Law protected consumers against unfair terms in standard forms but small businesses were exempt.

An unfair contract term will exist when and if:

  • It might lead to a significant imbalance between the contractual rights and obligations of each party;
  • It does nothing (reasonable) to protect the legitimate business interests of the party that enjoys the benefit of the term in question; or
  • It may detrimentally affect one party, whether financially or in some other way.

Examples of an unfair contract term are:

  • A term may give exclusive right to one party to terminate the agreement or amend its terms; or
  • A term may allow a bigger business to unilaterally change the price during the course of the contract, which may be considered unfair in certain circumstances.

Who is affected by the recent laws?

Businesses that offer standard form contracts to small businesses must comply with the new laws, which could otherwise allow a court to cancel out terms it finds unfair.

The changes will not only have an impact on small businesses, who will receive the benefit of the amendments, they could also have a significant impact on suppliers, franchisors, landlords and other utility providers.

Any contracts entered into or renewed, or terms of existing contracts that are varied on or after 12 November 2016, will be required to comply with the current legislation.

Suppliers supplying anything to small businesses under standard form contracts must ensure they are compliant with the laws. Similarly, it will be prudent for franchisors to have their documents reviewed to locate and remove any unfair contract terms and ensure the contracts remain enforceable.

If you are running a business and you wish to check that your contracts do not contain unfair terms, please contact Senior Litigation Lawyer, Lynda Lim, for a full and frank discussion.

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