Did you know that from 12 November 2016 there will be changes to 'business to business' contracts, so that if you are a small business and you enter into a contract (for instance with your bank or a lessor) you now have increased protecting against 'unfair' clauses in those contracts if they are 'standard form' contracts. If you are a business that uses standard form contracts, have you reviewed your contracts in preparation for these changes?
What is changing?
Changes have been made to the Australian Securities and Investments Commission Act 2001 and the Competition and Consumer Act 2010 so that (very broadly speaking) the protections that used to apply to 'consumers' now also apply to 'small businesses'.
These changes are federal changes, that is the legislation is national legislation, and are made pursuant to what is known as the 'corporations power' under the Constitution. There are still other federal and also state legislative requirements to be taken into account when reviewing your contracts.
Why is it changing?
The government promised at the last election to 'give small business a fair go' and this is part of the attempt to help small businesses when they are dealing which much larger corporations. The legislation is mostly aimed at pro forma documents and unfair bargaining positions, for instance when you apply for a loan and the bank gives you a standard pro forma contract that apparently cannot be altered. Certain clauses in those contracts, such as the bank's ability to unilaterally change any and all terms without notice, and without allowing you to exit the contract without penalty once those clauses are changed, will now be deemed 'unfair' by a Court and can be struck out.
How is it changing?
Some examples we have found of clauses that will be 'unfair' clauses pursuant to the new laws, and therefore subject to the Court's power to strike them out:
- terms that allow the contract provider to unilaterally vary all terms, or terms that have a significant impact on the agreement, without notice and without any restriction
- unlimited and unnecessary indemnities that the small business must give against loss and damage, including either no limitation of liability, or damage that was contributed to by the contract provider, or damage or loss that was not mitigated by the contract provider
- terms that enable one party (but not another) to avoid or limit their obligations under the contract
- terms that enable one party (but not another) to terminate the contract
- terms that penalise one party (but not another) for breaching or terminating the contract
- terms that enable one party (but not another) to vary the terms of the contract.
- a term under which a default by the small business borrower results in the small business being liable to pay large and excessive default fees.
- a lease term that provides for automatic roll-over unless the small business gives very specific notice or purchases something, and if the small business should fail to do so and wish to exit the contract then significant fees apply.
A term is likely to be unfair if it imposes an unfair cost on the small business that appears to exceed the amount required to protect the lender's legitimate interests. A term is likely to raise concerns under the unfair contract terms law if it allows the lessor to automatically renew the contract without the small business giving its consent. A term is likely to raise concerns if it allows the contract provider to unilaterally increase the price.
As the legislation is new, there are no actual examples of clauses that have been found to be unfair by the Courts, these examples are taken from various government websites. Basically, at the moment what we are looking for is terms that fail The Castle test, it is the vibe of the thing. If you are unsure, you should come and speak with Jacinta Watkins or Bruce Coode who are both experienced at litigating unfair clauses.
When is it changing?
The changes apply to any contract entered into on or after 12 November 2016, or any changes to any contracts made on or after 12 November 2016.
Who will this impact?
The legislation has been amended to that the protections that used to apply to consumer contracts now also apply to small business contracts. You are a small business if you employ less than 20 people, and only one party needs to be a small business. The contract must also be for a supply of goods or services, or a sale or grant of an interest in land. It must be for less than $300,000 or, if the contract is for more than 12 months, for less than $1,000,000 not including interest. This legislation does not apply to your contracts with your insurer.
What should I do?
If you issue standard form contracts in your business, or if you are a small business and you have signed a standard form contract, then you should make an appointment to speak with Bruce Coode or Jacinta Watkins about your matter. They are both experienced commercial litigators who can help you figure out whether these laws apply, what your options are, and how much that will cost.