KP Carmody & Co

Standard forms of contract have long been a bone of contention for small business operators as they are seen as “one-sided” and “non-negotiable”. 

All that will change on 12 November 2016 when the Amendment (Small Business and Unfair Contract Terms) Act 3026 (“Small Business Act”) commences.  It will extend the notion of unfair standard form (or standard terms) to non-consumer contracts for small business. 

On the one hand it is argued by proponents of the standard form business contracts that they promote efficient by avoiding a waste of time and money in negotiating their terms.  On the other hand small businesses believe that far from promoting an efficient market place, standard form contracts distort the relationship between seller and buyer and allow the imposition of one-sided contracts leaving little or no recourse to the weaker party (small business owner).

Both the Australian Consumer Law 2010 and the Australian Securities and Investment Commission Act 2001 (ASIC Act) have broadly equivalent terms relating to consumer unfair contracts.  However, they did not deal with small business.  The Small Business Act amends the above two acts to extend the unfair contract term protections that are currently available to consumers, to small businesses, defined as businesses with less than 20 employees. 

In determining whether a contract will come within the definition of a standard form contract, a court must take into account a number of factors including whether one party has most of the bargaining power, it was prepared by one party before any discussions about its terms took place and that the contract was presented on a “take it or leave it” basis. 

A term in the contract will be ignored if it is “unfair”.  The Act prescribes certain tests for unfairness including if it would cause a significant imbalance in the parties’ rights and obligations or it is not reasonably necessary to protect the legitimate interests of the party advantaged by that term or it would cause detriment to a party.  There are examples given in the legislation of unfair terms. 

The Act is restricted to small business contracts which are defined to mean a contract where one party has less than 20 employees and the upfront price on the contract does not exceed $300,000, or if the contract is for more than 12 months, $1,000,000.  A small business operator may seek orders for a declaration that the contract is void in whole or in part, varying the terms of the contract, refusing to enforce the contract terms, return of the property or refund of its value and other orders.  The court may also issue pecuniary penalties. 

These reforms facilitate small businesses to challenge contracts with unfair terms in them. 

The advice in this contract is general in nature.  For specific advice please contact your legal practitioner for more information.