In November 2016, changes to the Competition and Consumer Act 2010 (“CCA”) and the Australian Securities and Investments Commission Act 2001 (“ASIC Act”) came into effect extending the B2C unfair contract term laws to a business-to-business (known as “B2B”) context; this means that unfair contract terms in small business contracts can now be declared void.
A term in a contract can be declared void by a court on application for a declaration by another party to the contract or by a regulator (e.g. ASIC or the ACCC).
A term is likely to be declared by the court to be void if it is:
- in a contract regarding an interest in land or the supply of goods or services;
- a ‘small business contract’ which is also a ‘standard form contract’; and
What is 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).
What is a ‘standard form’ contract?
Contracts for small businesses are likely to be considered by the court to be standard-form contracts if they are:
- prepared in advance for a small business to sign;
- offered on a ‘take it or leave it’ basis to all small businesses; and
- not subject to negotiation.
What does “unfair” mean?
A term may be declared by the court to be unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- it is not reasonably necessary to protect the advantaged party’s legitimate interests (in practice, a term is presumed not to be necessary unless proven otherwise); and
- it would cause detriment to a party if it were relied on (however, there is no requirement that actual detriment be demonstrated or for a term in a contract to have been relied on to actually have occurred).
In determining if a contract 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 examples of unfair contract terms contained in the CCA and ASIC Act include those terms which permit one party to:
- avoid or limit performance;
- vary the terms of the contract unilaterally;
- terminate, renew or not renew the contract;
- determine whether a breach has occurred; or
- determine the meaning of the contract.
How does this apply to existing contracts?
The changes to the CCA and ASIC Act apply to contracts entered into or renewed (automatically or otherwise), and to terms in contracts which have been varied, on or after 12 November 2016.
What does this mean for businesses?
If a term is declared void, the contract will continue to bind the parties if it is capable of operating without that specific term. The court will not ‘rewrite’ the agreement between the parties, so the parties will be responsible for the balance of the contract without the benefit of the term that is declared void.
Although there are no fines or penalties for having a term declared unfair, all businesses should consider the enforceability of their standard term contracts to minimise the risks that various terms might be declared void.
Please contact Zafra Legal on 08 6212 3777 if you require advice and/or assistance in relation to unfair contract terms.