22 November 2016

Changes to the unfair contract laws for small businesses

The small business unfair contract laws are here.  From 12 November 2016, the existing unfair contract laws will be extended to protect small business.

The changes aim to assist small business with further rights for contract terms that are unfair.  Particularly as small businesses are regularly presented with standard form contracts on a ‘take it or leave it’ basis and often do not have the resources, time or bargaining power to negotiate these types of contracts.

The protections for unfair contract terms will only extend to standard form contracts and individually negotiated contracts will not be covered.  The types of contracts that are likely to benefit from the protections include franchise agreements, telephone services, motor vehicle purchases, leases and other service agreements.

Terms in these types of contracts will be void and unenforceable if they are found to be unfair.  Whether a term is unfair will depend on the circumstances, but the Competition and Consumer Act provides that a contract term is unfair if it:

  1. causes a significant imbalance in the parties’ rights and obligations under the contract;
  2. is not reasonably necessary to protect the legitimate interest of the party advantaged by the term; and
  3. would cause detriment to the consumer (now including a small business) if it was relied upon.

For example a term allowing one party to vary the contract without consulting the other may, in the circumstances, be considered unfair and void or a term that penalises one party to contract (but not the other) for breach or termination of the contract may be considered unfair.

The contract must also be a ‘small business contract’ to get the benefit of the protections.  This means the contract must:

  1. have at least one party to it who employs less than 20 people; and
  2. the upfront price of the contract does not exceed either:
    • $300,000.00; or
    • if the duration of the contract is more than 12 months, $1,000,000.00.

If you operate a small business and have questions about these new laws and how they will affect you, please contact our commercial department on 4036 9700.

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