From 12 November 2016, small businesses will receive important protection from unfair terms in standard form consumer contracts.
As a result of long awaited legislative change, the Australian Consumer Law (ACL), which currently contains provisions designed to protect individual consumers from unfair terms in standard form consumer contracts, will extend these protections to contracts for small businesses.
WHAT YOU NEED TO KNOW BEFORE 12 NOVEMBER 2016
1. Is your business considered a ‘small business’?
A small business is defined as a business which employs less than 20 people, including casuals who are employed regularly and on a systemic basis.
2. Is your small business party to a small business contract?
A small business contract is between two or more parties whereby one party is a small business. A small business contract must be for either a maximum of $300,000 or, if the contract extends beyond 12 months, $1,000,000.
The legislative changes to the ACL do not apply to all small business contracts, for example they do not apply to the following:
contracts entered into before 12 November 2016 (unless renewed after this date);
constitutions of companies or managed investment schemes; or
certain insurance contracts.
3. Has your small business been exposed to unfair terms?
A term of a small business contract will be considered unfair if:
it would cause a significant imbalance in the parties' rights and obligations arising under the contract;
it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The ACL provides a list of examples of the kinds of terms that would be considered unfair in a small business contract, including a term that permits, or has the effect of permitting, one party (but not another party) to:
avoid or limit performance of the contract;
terminate the contract;
renew or not renew the contract; or
penalise one party (but not another) for breaching or terminating the contract.
4. What is the effect of an unfair term?
Either a party to a small business contract or ASIC may apply to the Federal Court of Australia or the Victorian Civil and Administrative Tribunal to seek a declaration that a term of a small business contract is unfair.
If it is determined that a term is unfair, the term will be void and treated as if it never existed in the contract. The contract will continue to bind the parties if it is capable of operating without the unfair term.
Ordinarily, an unfair contract term will not attract a pecuniary penalty, however a pecuniary penalty may arise if a business continues to rely on a term that has previously been declared to be unfair and may constitute false or misleading conduct under s 29(1)(m) of the ACL.
For more information or for assistance with a contract, please contact: