Imminent changes to Unfair Contract Terms regime

Anyone who enters into a standard form contract with a small business should take immediate steps to assess their potential exposure to the new regime.

Clients are reminded that from 12 November 2016 changes to the Competition and Consumer Act 2010 (CCA) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) come into effect which will mean that unfair terms in standard form small business contracts can be declared void.

This note contains a ‘checklist’ which may assist in considering the application of the new regime to your contracts. Members of our team are available to assist you in assessing the risks to your organisation. 

Key elements of the new regime

From 12 November 2016, a term can be declared void if it is:

• in a contract regarding an interest in land or the supply of goods or services;
• the contract is a ‘small business contract’ which is also a ‘standard form contract’; and
• ‘unfair’, as defined in the new regime.

An application for a declaration that a term is void may be made by another party to the contract, or a regulator (e.g. ASIC or the ACCC).

Broad definition of a ‘small business contract’

A ‘small business contract’ is a contract where:

• at least one of the parties is a business employing fewer than 20 people (including casual employees employed on a regular and systematic basis); and
• the upfront price payable under the contract does not exceed $300,000 (or $1,000,000 if the contract term exceeds 12 months). 

Companies will rarely know the number of people employed by contractual counterparties. This will create some uncertainty regarding the extent to which a party is subject to the new regime.

When is a contract a ‘standard form’ contract?

In determining if a contract is a standard form contract, a court may consider if there is unequal bargaining power, if the contract is prepared by one party prior to negotiations, is not subject to negotiation between the parties and is offered on a ‘take it or leave it’ basis.

The meaning of ‘unfair’

A term may be declared unfair if:

1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
2. it is not reasonably necessary to protect the advantaged party’s legitimate interests (it is presumed not to be); and
3. it would cause detriment to a party if it were relied on.

There is no requirement that actual detriment be demonstrated or for a term to have been relied onto actually have occurred.

In determining if a term is unfair, the court will consider the transparency of the term (i.e. how clearly it is communicated) and the contract as a whole. The CCA and ASIC Act provide examples of unfair terms, including those permitting only one party to:

• avoid or limit performance;
• vary the terms of the contract;
• terminate, renew or not renew the contract;
• determine whether a breach has occurred; or
• determine the meaning of the contract.

Will the regime apply to existing contracts?

The legislation applies to contracts entered into or renewed (automatically or otherwise), and to terms in contracts which have been varied, on or after 12 November 2016.

Accordingly, the new regime will apply to ongoing contracts without any action by either party to the contract.

Checklist

This checklist applies to ‘small business contracts’ (the key elements of which are set out in questions 1 to 3 on the downloadable form).