It is important to be aware of the terms that are contained within your business contracts. If you are imposing terms and you’re not sure whether they are fair to both parties to the contract, this blog is for you.
What is a standard form contract?
If a party alleges that a contract is standard form, it is presumed to be so unless proven otherwise. In determining whether a contract is a standard form contract, the following must be considered:
- whether one of the parties has all or most of the bargaining power relating to the transaction;
- whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
- whether another party was, in effect, required either to accept or reject the terms of the contract;
- whether another party was given an effective opportunity to negotiate the terms of the contract; and
- whether the terms of the contract take into account specific characteristics of another party of the particular transaction.
In October 2022, the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 was passed. The bill, which will come into force in late 2023, clarifies that a contract may be standard form despite:
- an opportunity to negotiate changes that are minor or substantial in effect;
- an opportunity to select a term from a range of options; or
- an opportunity for a party to another contract to negotiate terms of the other contract.
If it is determined that the contract is a standard form contract, what must next be considered is whether the contract is a consumer contract or a small business contract.
What is a consumer contract?
A consumer contract is a contract for a supply of goods or services; or a sale or grant of an interest in land; to an individual whose acquisition of the goods, services or interests is wholly or predominantly for personal, domestic, or household use or consumption.
What is a small business contract?
A small business contract is defined as a contract that is for a supply of goods or services, or a sale of grant of interest in law. At the time the contract is entered into, at least one party to the contract must be a business that:
- employs less than 20 people; and
- either of the following apply:
- the upfront price payable under the contract does not exceed $300,000; or
- the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
As previously mentioned, the 2023 amendments will also expand the definition of a small business contract to include contracts were:
- at least one party (at the time of entering into the contract) is a business that employs fewer than 100 people (up from 20 people); or
- has a turnover for the last income year of less than $10,000,000.
How to determine if a contract term is unfair?
A term will only be unfair if three tests are satisfied, the term must:
- cause a significant imbalance in the parties’ rights and obligations under the contract;
- not be reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
- cause financial or other detriment to a party if it were relied upon.
Examples of unfair contract terms include but are not limited to:
- terms that permit one party, but not the other, to terminate the contract;
- terms that penalise one party, but not the other, for a breach or termination of the contract; and
- terms that permit one party, but not the other, to avoid or limit performance of the contract.
Specific examples include:
- automatic renewal clauses;
- unilateral price increases;
- setting the price after the contract is signed;
- restricting commentary about a business; and
- indemnity clauses that hold customers or other businesses responsible for losses out of their control.
What are the consequences?
Currently, the consequence of using or relying upon an unfair contract term is that the term that is considered to be unfair is declared void. However, the proposed 2023 amendments will allow a court to impose serious financial penalties where businesses break these provisions of the Australian Consumer Law.
It’s important to know what contract terms are permissible and which ones are at risk of being viewed as unfair. If you need assistance with ensuring your standard form contracts meet the new legal requirements, talk to us. Our business is protecting yours.