Proposed legislation provides new Protections against unfair contract terms
Have you ever entered into a contract that you thought was unfair or contained unreasonable terms? Did you hesitate to negotiate that contract with the other party because they were a company with a greater bargaining position, and fail to give consideration to what you were signing? In our experience we have found that most small business owners will have done this at some point in time, although often they may not admit that this is the case.
Current federal legislation protects consumers from these types of contracts but there are currently no such protections in place for businesses. This may be due to change soon, however, following an announcement by the Government on 28 April 2015 that they were considering extending the protections afforded to consumers to small businesses.
What is a Small Business contract?
The draft legislation defines a small business as a business with less than 20 employees. The legislation also defines a small business contract as one where the upfront payment due under the contract is less than $100,000.00 or the contract is for a period of over 12 months with a total price of not greater than $250,000.00.
What are the protections?
The legislation currently provides that where a consumer enters into a contract that contains an unfair term, that term or the entire contract can be declared void depending on the effect of the term that was included.
An unfair contract term is a term that:
- Causes a significant imbalance in the parties rights and obligations under the contract;
- Would cause detriment (and this does not need to be financial) to one of the parties to the contract; and
- Is not reasonably necessary to protect the legitimate interests of the party in whose favour the term is written.
As this is fairly new legislation it has not been fully tested as to the exact meaning of the above criteria. Each case would need to be looked at on its on facts and merits.
The legislation will not cover every possible situation, and business owners should not assume that they are protected from an unfair term simply because of the legislation. It should also be noted that the process of obtaining an order from a Court that a contract term is unfair will, especially in the early stages, be a lengthy and costly process. Therefore it is prudent that, as always, you engage a professional lawyer to review any agreements that you are seeking to enter into to make sure that your rights are protected.
When will it come in to effect?
As stated above the legislation has not yet passed but is currently in a consultation phase, however once it is announced it will likely come into effect 6 months after the announcement.
We will provide a further update in our newsletter when these changes come into effect.
Businesses will need to keep up to date with these changes and comply with their requirements, as a clause in a contract that is deemed unfair for one customer will likely be unfair for all of your customers. It is important that you give consideration to the drafting of your agreements in light of these provisions to ensure that any term that may be considered unfair is properly considered.
Similarly, if you are entering into a contract that you believe may have an unfair term, you should have that agreement properly considered.
How we can help
At Streten Masons Lawyers we have extensive experience in drafting agreements for clients, reviewing agreements, and advising business owners where they are entering into agreements to ensure that the terms of those contracts are fair, reasonable, and in compliance with the law.
Once this new legislation is in place it will be crucial that you ensure that your agreements are compliant to avoid unnecessary legal costs. Please contact Jeremy Streten on 07 3667 8966 or Jeremy@smslaw.com.au if you have any questions in relation to these new laws.