Small businesses protected from unfair contract terms

Articles, Commercial Contracts

The Federal Government has released an exposure draft of proposed legislation that, if passed, will extend consumer protections against unfair contract terms to “small business contracts”.  This will have the effect of giving small businesses protections that presently are limited to consumers in relation to challenging unfair terms of contracts under the Australian Consumer Law which may complicate some contractual disputes.

A contract will be deemed to be a “small business contract” if at the time the agreement was made, at least one party to the agreement employs less than 20 persons, the value of the contract does not exceed either $100,000 or $250,000 where the duration of the contract is more than 1 year.  It is important to note that for credit contracts interest should not count towards this threshold.

The new protections will work in the same way as unfair terms in a standard form consumer contract may be challenged.  A consumer in that case can seek to have a term declared to be unfair.

A contract will generally be presumed to be a standard form contract unless one of the parties to the contract allege otherwise.

Section 24 of Australian Consumer Law defines an “unfair term” as one that:

  • Would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • Is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • Would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

While an unfair term may be declared void, small businesses will still be bound by their contractual agreements to the extent the contract is capable of operating without the unfair term.

This change has the potential to complicate contractual disputes, particularly in relation to clauses which may penalise one party for a breach or non-performance.

For more information please contact Simon Gallant.

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