New Laws Expand the Protection of Unfair Contract Terms Legislation to Small Business Contracts

The Federal Government has introduced new legislation to enhance the protections afforded to small businesses in relation to contracts entered into or varied on or after 12 November 2016. The changes will expand the already established nullification of unfair contract terms applicable to consumer contract to small business contracts.

A contract is a “small business contract” if:

1. the contract is for a supply of goods, services, financial products or financial services, or a sale or grant of an interest in land;
2. the contract is a standard form contract;
3. at the time the contract is entered into at least one party is a small business which is one that employs fewer than 20 persons on a regular and systematic basis (i.e. the small business may be the supplier or the acquirer of the goods or services); and
4. either, the upfront price payable under the contract does not exceed $300,000.00 or if the contract has a duration of more than 12 months the upfront price payable under the contract does not exceed $1,000,000.00.

When deciding whether a contract is a standard form contract, the court will consider among other things, whether a party was given a reasonable opportunity to negotiate the terms of the contract, whether the contract was offered on a ‘take it or leave it’ basis and whether the contract was prepared by one party prior to any negotiations taking place between the parties in relation to the relevant transaction.

The proposed legislation provides that a term of a small business contract will be unfair if the term:

1. would cause a significant imbalance to the parties’ rights and obligations arising under the contract;
2. is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

For example, a term would likely be unfair if the term allowed only one party to terminate or amend the contract, avoid or limit performance of the contract, renew or not renew the contract or penalise the other party for a breach of the contract. If a term is found to be unfair then it will be void and not binding on either party.

All businesses dealing with small businesses, individuals or contractors should consider the above amendments and review new or existing contracts that have been entered into or renewed on or after 12 November 2016. Importantly, these amendments will likely affect a wide range of contracts including franchise agreements, contracts for the sale of property or motor vehicles, loan agreements and intellectual property licences.

If you would like further information in relation to unfair contract terms and small business contracts, or if you would like for us to review your small business contract, please contact Renze Verheyen of our office.