4 February 2016

Top 5 Unfair Contract Terms

Beverley Thomas, Associate

From 12 November 2016, the Unfair Contract Term (“UCT”) protections under the ASIC Act 2001 (“ASIC Act”) and the Australian Consumer Law (“ACL”) currently only available to consumers will be extended to cover small businesses. Under these provisions, standard form contracts are void to the extent they contain unfair terms but will continue to bind the parties if they can operate without the unfair term. Here are our top 5 takeaways to help you understand what these changes mean for your organisation.

1. What do the amendments affect?

The law will apply to standard form contracts entered into or renewed on or after 12 November 2016 where the contract is for the supply of goods or services or the sale or grant of an interest in land, the upfront price under the contract is under the threshold amount (either $300,000, or $1 million if the contract is for more than 12 months) and at least one of the contracting parties is a small business (employs less than 20 employees, including casual employees engaged on a regular and systematic basis). 

2. How do these amendments tie into my workplace practices?

If your organisation offers to small businesses standard form contracts that are valued at less than the prescribed threshold, then you should review and amend your suite of template contracts to ensure they are compliant with the new protections. Standard form contracts are generally pre-prepared by one (bigger) party with greater bargaining power and offered to the other (smaller) party on a “take it or leave it” basis with little to no scope for negotiation. From a workplace perspective, examples of standard form contracts that your organisation should review include:

  • independent contractor agreements;
  • tripartite agreements between a principal, an entity and its key personnel;
  • consulting services agreements; and
  • labour hire agreements.

3. What is an unfair term?

A term of a standard form contract will be unfair and therefore void if it would cause a significant imbalance between the parties, is not reasonably necessary to protect one party’s legitimate interests or would cause a financial or other detriment to one party if relied upon. Examples of possible UCTs include terms that would enable or permit one party (but not another) to:

  • terminate the contract;
  • avoid or limit performance of the contract;
  • impose a penalty for a breach or termination of the contract;
  • vary the terms of the contract;
  • renew or not renew the contract;
  • vary the upfront price payable without permitting the other party to terminate the contract; and
  • limit the other party’s right to sue another party.

The transparency of the UCTs within the standard form contract will have a bearing on whether the term is considered to be unfair. 

4. What could happen if we don’t comply with the amended UCT Laws

The ACCC or the small business party to the contract may commence legal proceedings claiming that your organisation has breached the UCT protections. It will be the role of a Court to determine whether a term in a standard form contract is unfair and to make orders that remedy any breach of the UCT protections. Your organisation could be liable under the UCT provisions of the ASIC Act and the ACL if a Court finds that you have included UCTs in your standard form contract.

UCTs in standard form contracts will be declared void and unenforceable. However, to the extent possible, the contract may continue to operate without the UCTs. If contractual terms are no longer binding on parties it could dramatically impact the effectiveness of the standard form contract. It could prevent the completion of a project if personnel no longer provide services due to unenforceability of the agreement and the damage to your ongoing commercial relationships may be compromised. 

5. What should our organisation do?

While the amendments to the UCT laws will only apply from 12 November 2016 onwards, now is the time to:

  • review your relevant standard form contracts for any UCTs and the transparency of any terms that could be construed as unfair;
  • consider whether it is necessary for your organisation to offer standard form contracts and whether a more flexible approach can be taken towards negotiating agreements;
  • assess whether the value of your standard form contracts may be in excess of the monetary thresholds for UCT laws applying; and
  • decide whether to have two sets of documents – one to issue to small businesses for contracts within the threshold amount and the other to issue to other businesses in accordance with your usual protocol.
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