One of the most significant statutory developments to have occurred to contract law in Australia over the past decade is in force from 12 November this year.
From this date, the 'unfair contract term' regime that currently applies to consumers will be extended to cover certain 'standard form' small business contracts. This will include contracts renewed or varied on, or after, the November date.
TAKE THE QUIZ NOW
The team at Henry Davis York has prepared for clients a quiz to help establish if you have a clear understanding if a contract term will be regarded as fair, unfair or remains in the 'grey area' of the law under the new regime.
Test your knowledge and understanding of this important change to contract law.
The reforms will see the amendment of both the Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) to prohibit unfair contract terms in certain small business 'standard form contracts'.
A key driver of the reforms is the desire to protect small businesses, especially those in situations where they are dealing with larger entities and a perceived unfair advantage may arise.
In August this year, Australian Competition and Consumer Commission (ACCC) Deputy Chair Dr Michael Schaper issued a timely reminder to industry about the importance of becoming compliant with the reforms. He noted that, during the ACCC's engagement with industry, it appeared many sectors still remained unprepared.
Dr Schaper urged "all businesses that issue standard form contracts to undertake a review of their terms in the lead up to 12 November to ensure that they are compliant with the new laws."
Who is affected?
The reforms are relevant to any entity that uses a standard form contract when entering into a business-to-business transaction. This will include certain public sector entities to the extent that they 'carry on a business'.
Contracts that may be affected include:
- Supply of goods and services contracts
- Distribution contracts
- Consultancy agreements
- ICT supply contracts
- Venue hire agreements
- 'Design and construct' and 'construct only' contracts
- Commercial leases
- Contracts for the supply of financial products and services.
To check if the reforms apply to a particular transaction, you can apply the four-step test found below. If you answer 'yes' to all of these questions, then (subject to a small category of exceptions) the reforms will apply to your transaction.
A 'standard form contract' is a contract that is provided by a party on 'a take it, or leave it basis', including where there has not been an opportunity to negotiate its terms.
A 'small business' is one that employs fewer than 20 persons, including casual employees where they are employed on a regular and systematic basis.
What is an 'unfair term'?
An 'unfair term' is a term that:
- causes a significant imbalance in the parties' rights and obligations under the contract;
- causes detriment to a party; and
- is not reasonably necessary to protect the legitimate interests of the party that would be advantaged by the term.
In determining whether a term is unfair a court may take into account matters it thinks relevant but it must take into account:
- the extent to which the term is transparent; and
- the contract as a whole.
A 'transparent term' includes a term that is expressed in reasonably plain language, is legible, presented clearly and readily available to any party affected by the term.
Both the ACCC and ASIC have released publications that provide additional guidance on the application of the reforms and what constitutes an unfair term. Please click here to view the ACCC Information Sheet and here to view the ASIC Information Sheet.
The reforms do not apply to terms that define the main subject matter of contracts or where the term is required by a Commonwealth, State or Territory law. Some other exclusions also apply.
Consequences of non-compliance
If a contract includes an 'unfair term', the court may determine that the term is void and should be struck-out. In addition, reputational damage could arise for the entity that drafted the term, especially if the court case attracts the attention of the media.
How HDY can help
HDY recommends that organisations transacting with small businesses should review their standard form contracts to ensure compliance with the reforms.
We can assist you to:
- review and update your standard form contracts to identify and remove 'unfair terms';
- develop separate, stand-alone contract templates for small business contracts;
- train your staff on compliance with the reforms and, where applicable, how to negotiate terms where they are likely to fall foul of the reforms; and
- understand the application of the reforms to your business and your contracts.
We are grateful for the assistance provided by Sarah Walters, HDY's Director of Knowledge Services, in preparing this Insight and the unfair contract terms quiz.