Late last year changes were introduced to the legislative framework governing unfair contract terms. The purpose of this blog is to inform our readers of these changes and assess the key impacts on contracting.
What are the changes?
The legislative scheme attempts to protect small businesses from unfairly onerous contract terms. The regime applies to all relevant contracts entered into or renewed on or after 12 November 2016.
The legislation states that terms within a contract may be deemed “unfair” in situations where that term:
- Causes a significant imbalance in the parties’ rights and obligations;
- Is not reasonably necessary to protect the legitimate interests of the benefitted party; and
- Causes detriment (either financial or otherwise) to the other party.
What situations do this area of law cover?
The laws relate to small business contracts, where:
- The contract is for the supply of financial goods or services;
- At least one of the parties is a small business – employs fewer than 20 people; and
- The upfront price payable under the contract does not exceed $300,000 in less than 12 months, or $1 million if the contract is for more than 12 months; and
- Upfront price payable includes the amount borrowed (principal), any interest payable and fees disclosed at the time the contract is entered into, but not contingent fees such as fees arising from default
- Subject to certain exemptions, the contract is of standard form (not generally negotiated) for the supply of goods or services, or grant of an interest in land.
- This refers to contracts that are pre-prepared as a 'one size fits all' standard document, usually offered on a 'take it or leave it' basis.
The regime does not apply to terms that define the subject matter of a contact, i.e. the term that defines what the goods or services that are being supplied under the contract. This is because it would be unfair to allow a consumer to escape a particular term where they had a choice on the basis of what was offered, and agreed.
Possible examples of "unfair" terms
Terms that might be deemed legally ‘unfair’ include those that allow one party to:
- vary or terminate the contract;
- renew or not renew the contract;
- vary the price or characteristics of what is to be supplied (without the other party being able to terminate the contract);
- assign the contract without consent;
- impose an evidential burden on the other party in proceedings or limit the other party’s right to sue or adduce evidence;
- determine if a breach has occurred or impose a penalty for a breach or termination.
What happens if a term is deemed "unfair"?
Only a court can determine whether a contract term is unfair. If this occurs, the term will be deemed void ab initio – as if it never existed and was never a part of the contract. The contract will otherwise continue to operate, unless the term was so central to the contract as a whole that it cannot operate without the unfair term.
The relevant law does not make it an offence or impose statutory financial penalties for including an unfair term in a small business contract. However, a Court may award compensation.
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