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Unfair contract terms protection for small businesses

On 12 November 2016, amendments to the Australian Consumer Law came into effect that protect small businesses against unfair terms in ‘standard form contracts’ (take it or leave it contracts where you can’t negotiate—such as for mobile phone plans).

The amendments include definitions of who and what qualifies for these protections:

  • At least one of the parties must be a small business (employs fewer than 20 people, including casual employees).
  • The contract must be a standard form contract for the supply of goods or services or the sale or grant of an interest in land.
  • If the contract is for 12 months or less, the upfront price payable (the price that can be determined at the time the contract is entered into) must be no more than $300,000.
  • If the contract is for more than 12 months, the upfront price payable must be no more than $1 million.
  • The contract must have been entered into or renewed on or after 12 November 2016.

A term may be unfair if it:

  • doesn’t fairly divide the parties’ rights and obligations
  • is not necessary to protect the other party’s business interests and
  • would cause loss to the small business.

Unfair terms might give one party, but not the other, the right to:

  • avoid or limit delivering on the contract
  • terminate the contract, with or without the small business’ knowledge
  • avoid penalties for breaking or terminating the contract
  • change the terms of the contract
  • renew the contract automatically
  • change the upfront price without giving the small business the option to cancel the contract
  • vary the characteristics of the goods or services to be supplied.

As with unfair contract terms for consumers, only a court can determine if a term is unfair. When a term of a contract is found to be unfair, the term is void, so legally it is as if it never existed. The contract itself is still valid to the extent it can operate without the term.

A term on its own may seem unfair. However, the term may be reasonable when it is looked at as a part of the whole contract.

Contracts for small businesses are standard-form contracts if you:

  • prepare them in advance for a small business to sign
  • offer it on a ‘take it or leave it’ basis to all small businesses
  • will not negotiate on contract terms with small businesses.

Some common standard-form contracts for small businesses are:

  • services provided, such as
    • information technology
    • advertising
    • document handling
    • security
    • transport
  • mobile phone contracts
  • utilities.

Contracts and terms that are not covered for small businesses

There are a number of contracts excluded from the unfair contract term protections, being:

  • contracts entered into prior to 12 November 2016, unless renewed on or after
  • shipping contracts
  • constitutions of companies, managed investment schemes or other kinds of bodies
  • certain insurance contracts, including car insurance.

There are number of terms excluded from the unfair contract term protections, being:

  • terms that define the main subject matter of the contract
  • terms that set the upfront price payable
  • terms that are required or expressly permitted by a law of the Commonwealth, state or territory.

Consumers

Consumers are protected from unfair contract terms in standard-form contracts.

These are contracts that are:

  • prepared in advance for consumers to sign
  • offer on a ‘take it or leave it’ basis to all consumers
  • will not negotiate on contract terms with consumers.

Some common standard-form contracts are:

  • mobile phone contracts
  • gym memberships
  • airline tickets
  • concert tickets
  • utilities.

Declaring a term unfair

Only a court can declare a term to be unfair. The court must:

  • take into account whether the term is transparent
  • consider the contract as a whole.

When a term of a contract is found to be unfair, the term is void as if it never existed. The contract is still valid to the extent that it can operate without that term.

A term on its own may seem unfair. However, the term may be reasonable when it is looked at as a part of the whole contract.

Types of unfair terms

Unfair terms might give you, but not the consumer or small business, the right to:

  • avoid or limit delivering on the contract
  • terminate the contract, with or without the knowledge of the consumer or small business
  • avoid penalties for breaking or terminating the contract
  • change the terms of the contract
  • renew the contract automatically
  • change the upfront price without giving the consumer or small business the option to cancel the contract
  • vary the characteristics of the goods or services to be supplied.