Are you ready? One month until unfair contracts rules extend to small businesses

 

12 October 2016
Posted by Suzy Wood

Attention small businesses: have you ever wondered whether your standard contracts are too one-sided?

If your standard form contracts entered into, varied or renewed after 12 November 2016 contain ‘unfair’ terms, those terms will be unenforceable according to new laws.  So, it’s important you get your template business contracts ‘fixed’ before the new laws come in.

The low-down  

Your business might already need to comply with the unfair contracts rules – for example, if you sell goods or services to individuals for their personal, domestic or household use (think clothing, food, trade services, and so on).

The chances are that your template business contracts and terms and conditions are caught by the legislation if:

– Your business has fewer than 20 employees (not including casuals, unless they have regular systemic hours); and

– The templates are used on a “take it or leave it” basis; and

– The money involved for each contract is under the threshold (up to $300,000 for contracts with a duration of 12 months of less; up to $1M for contracts with a duration of more than 12 months).

For Studio Legal clients, contracts that are likely to be captured include contractor agreements, terms of sale, client services agreements, management agreements, licence agreements, website and app terms of use and supply agreements (among others!).

If a term causes a significant imbalance in rights and isn’t reasonably necessary to protect your business’s legitimate interests, it’s likely to be considered unfair.

Fine print is not your friend: the courts might also be more likely to find that a term is unfair when it isn’t transparent. Consider bolding or italicising a contentious term, or moving it closer to the start of your contract.

Time to get a quick fix!

Studio Legal can ‘fix’ your contracts by identifying, taking out or amending unfair terms before the new laws come in. Send your template business contracts to hello@studiolegal.com.au and we will be able to quote you fixed fees for ‘quick fixes’.

How the laws work

Unfair contract terms provisions, found in the ASIC Act and the Australian Consumer Law, already apply to “consumer contracts”. Generally speaking, these are contracts for the supply of goods or services or the grant of an interest in land to an individual for personal, domestic or household use or consumption (think retail, food, hairdressing, and so on).

After 12 November, the rules will extend to all “standard form” contracts which meet the threshold for a “small business contract”.

If the rules apply, any term in the contract that is “unfair” will be void and unenforceable.

What does ‘unfair’ mean?

Unfair terms are terms that cause a significant imbalance in the parties’ rights, would cause detriment to the other side if they were relied on, and aren’t reasonably necessary in order to protect your business’s legitimate interests.

The rules also provide a “grey list” which gives some idea of the kinds of terms that might be considered unfair. On the grey list are terms like these:

– Terms that permit one party (but not the other) to avoid performing their obligations under the contract

– Terms that allow one party (but not the other) to terminate the contract

– Terms that penalise one party (but not the other) for breaching the contract;

and so on.

The law also requires courts to consider how “transparent” a term is when deciding whether or not it is unfair, which means the fine print is no longer a great hiding place for one-sided contract terms. Things like using plain language, bolding, underlining, increasing font size and moving the term to a more prominent position in the contract can all help to ensure the term is “transparent”.

Do the rules apply to your business?

The contracts must be both “small business” and “standard form” contracts.

A small business contract is a contract where:

– At the time the contract is entered into, at least one party is a business that employs fewer than 20 people; and

– For contracts with a duration of 12 months or less – the upfront price payable under the contract does not exceed $300,000 OR for contracts with a duration of more than 12 months – the upfront price does not exceed $1M.

The next question is whether the contract is a standard form contract. Bespoke agreements that are tailored to a particular customer, client or business deal are unlikely to be captured. But unfortunately, there is no hard and fast rule about when a contract will be “standard form”. Instead, the legislation sets down a list of factors to be considered, which seem to point to the conclusion that if you use the contract as your default for a number of different parties, and you’re in the habit of presenting the contract on a “take it or leave it” or “non-negotiable” basis, your contract will meet this definition.

What your business needs right now

Small businesses have one month to identify, and fix, the unfair terms in their standard contracts before the legislation kicks in.

Having your templates reviewed by a professional will help protect your business by preserving the enforceability of your contracts, which could save you money, time and legal expenses in the long run.

Studio Legal is pleased to offer a fixed fee ‘contract quick fix’ to review your templates for unfair terms and redraft any problematic terms so they are less likely to be rendered void. All contract quick fixes are fixed fee, for your peace of mind. Email your template business agreements to hello@studiolegal.com.au and one of our solicitors will be in touch with a great rate.

DISCLAIMER

The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter