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Protection for small businesses from unfair contract terms

New legislation has been approved this month to protect small businesses from unfair contract terms. From the date the law comes into effect, any unfair term in a “standard small business contract” may be deemed void by a court or the NSW Civil and Administrative Tribunal.

What is an unfair term in a standard small business contract?

Australian Consumer Law provides that a term of a small business contract is unfair if it:

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

All the provisions must be satisfied for a term to be deemed unfair. However, the contract will continue to bind the parties, provided that it can still operate without the unfair term.

When is a small business contract affected?

A “standard small business contract” is a pre-prepared contract which generally offers no opportunity to negotiate the terms for the supply of goods or services, or the sale or grant of an interest in land.

The contracts affected will be those:

  • Where at least one of the parties is a small business that employs less than 20 people (including casual employees which work on a systematic and regular basis).
  • The upfront price payable under the contract is no more than $300,000 or $1 million if the contract is longer than 12 months.

When does the new law come into effect?

The new law comes into effect 12 months after Royal Assent, on 12 November 2016, and will apply to contracts entered on and after this date. This allows small businesses a one year grace period to review and amend their standard small business contracts in order to comply.

The new legislation may also apply to contracts made prior to the Assent date, if the contract is renewed or when a particular term of the contract is varied after the law comes into effect.

If you are a small business and have been offered a standard contract which you believe may contain an unfair term, it’s important you understand your protections under the new law. Alternatively, if you’re offering a standard small business contract it’s important you review your terms and conditions to ensure they comply with the new legislation.

 

Peter English

Director

(02) 9318 6411

peter.english@surrypartners.com.au

 

Angus Ferguson

Lawyer

(02) 9318 6415

angus.ferguson@surrypartners.com.au

 

December 2015

 

[1] Competition and Consumer Act – Schedule 2 2010 (Cth) s 24