Protecting Your Business: Uncovering Hidden Dangers in Contract Terms

January 30, 2017

In November 2016, the Australian Consumer Law was modified to extend the protection offered to consumers against unfair contract terms to small businesses. This is important as previously, small businesses (including sole traders) had no protection against predatory behaviour when contracting with big corporations. This meant that, while you could seek relief against unfair and prejudicial terms in your personal mobile phone contract or personal loan agreement for example, there was nothing you could do if the same term appeared in your business mobile phone contract or business loan agreement.

Important points

There are a number of important points to note about this change though.

The first is that it only applies to contracts entered into AFTER 12 November 2016.

Secondly, it is only available to small businesses – defined as employing less than 20 people, including casual staff who are regularly and systematically employed.

Third, the contract amount must be less than $300,000 (or $1M if the term of the contract is longer than 12 months).

Fourth, just like with the personal consumer unfair contract protection, it only applies to a standard form contract that you have been given no opportunity to negotiate.

Another important point to note is that some contractual terms are excluded from consideration. For example, you can’t complain about the price fixed by the contract. The term must not be one that is reasonably necessary to protect the party’s interests and there needs to be some financial detriment to you if they sought to rely on it.

What counts as unfair?

The kinds of terms which are likely to be considered unfair are those that lead to inequality when looking at the balance of power between the parties. So, for example, if the contract allowed the party offering the contract to recover full damages from you if you breached the contract, but there was a term that said they didn’t have to pay you anything if they were the one in breach, that term would almost certainly be unfair.

Similarly, if they had the power to terminate the contract but you were just stuck with it and had no way out regardless of your wishes or changes in your circumstances, that would be unfair. If there was a penalty clause that made you pay extra if you breached or terminated the contract, with no similar charge against them for breach or termination, that would be unfair. If they had the unilateral right to change or vary the terms of the contract, while you could not change anything, unfair.

Ultimately, only a court or tribunal (not the ACCC) can decide that a term is unfair.

The final really important point to note about this protection is that is can only be decided by a court or tribunal. The ACCC and ASIC have no power to make a decision that a contractual term is unfair. Because it is an issue affecting legal and commercial rights, it is a matter requiring judicial determination.

Are YOU being fair?

Oops… there is actually one more very VERY important point to note about this protection. If you use a standard form contract in your business – a specially drafted contract that you hand out to all your clients, and it contains any of these kinds of non-compliant clauses, you may find that you are in breach of the Australian Consumer Law.

The best way to avoid having your contract’s terms labelled unfair is to:

a) try to make sure that your contract is balanced – that the rights and obligations it creates are not all one-sided;

b) try to make sure that your contract is written in transparent language that is easy to understand so your clients and customers have a really good, clear idea of what they are getting into before they sign up; and

c) make sure you give your clients and customers an opportunity to negotiate the contract. That means asking them if there is anything in the contract they don’t understand, anything they are not comfortable with, anything they feel is unfair.

If you have put in the time and effort to ensure that your client is comfortable with the contract (and this can be as simple as a few comments in an email when you send the contract to them, and a quick check in with them at the time of signing), this not only removes the possibility of them later complaining that your contract was unfair, it also increases their trust in you as you welcome them into working with you.

How I can help

If you use a standard form contract and would like it checked for compliance, you might like to book an Advice on a Contract session with me.

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