• Ellison Moschella & Co

New changes to legislation protects small businesses from unfair contract terms

Updated: Mar 6, 2021

Small businesses often enter into contracts for the supply of Goods or Services or selling and purchasing land, which can sometimes be unfair. Many small businesses may feel they have no option other than enter into unfair contracts when dealing with large corporates. Every contract is a negotiation.

Examples of unfair terms are where the large supplier or customer can:

  • Unilaterally vary terms and prices: which can significantly change the original deal entered into and result in financial loss;

  • Include terms that unreasonably release them from liability from loss or damage: this can impose unreasonable indemnities and excessive limitation of liabilities on your small business; and

  • Include terms that allow them to unfairly end agreements: which can result in the significant loss and damage either from being unable to recoup capital investments costs or having the supply chain unexpectedly terminated.

However, the Australian Competition and Consumer Commission (ACCC) has recently introduced new changes to legislation that will protect small business from unfair contract terms.

WHAT ARE THE CHANGES? From 12 November 2016, Australian Consumer Law legislation (ACL) (s 23) allows a court or tribunal void unfair terms meaning the original contract will continue to exist, but without the unfair term. This allows smaller businesses a greater leverage when negotiating contracts with their larger customers and suppliers.

WHAT ARE THE REQUIREMENTS? For these new changes to apply the contract must satisfy some pre-requisites:

  • One of the parties to the contract must be a ‘small business’ – less than 20 employees including casual, part time or full time employees;

  • The contract price must not exceed $300,000.00. Or $1,000,000.00 if the contract length is more than 12 months;

  • Contract must be for the supply of Goods or Services or the sale or grant of an interest in land; and

  • The contract must be standard form.

Keep in mind that only contracts entered into on or after 12 November 2016 can rely on these new changes.

WHAT IS A STANDARD FORM CONTRACT? As there is no singular definition of a standard form contract, the Court or Tribunal will examine several factors. Essentially, the court will look at whether one party had greater bargaining power than the other and the ability of each party to negotiate terms.

HOW CAN I TELL IF MY CONTRACT IS UNFAIR? To use this new legislation, you must show the contract is unfair under the ACL. These three elements must be shown to be considered “unfair”:

  • The term significantly imbalances the rights of the parties;

  • the term is not reasonably necessary to protect the legitimate interests of the party supposedly advantaged by the term; and

  • Causes detriment to the small businesses (does not have to be financial) if it were to be applied or relied upon.

We regularly review supply contracts for our clients and have saved them tens of thousands. If you would like help securing your business risks we would be pleased to hear from you.

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