Unfair small business contracts will come Under Scrutiny!

unfair contracts

Consumers have enjoyed protection from unfair contract terms pursuant to the Competition and Consumer Act 2010 for some time now. On 12 November 2016 some of the protections given to consumers will be extended to small business contracts.

What is a “small business contract”?

 A contract is a small business contract if:

  • It is for the supply of goods or services, or the sale or grant of interest in land;
  • At the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
  • Either:
    1. The upfront price payable is less than $300,000; or
    2. If the duration of the contract is more than 12 months, then the upfront price payable does not exceed $1,000,000.

The definition covers a wide range of contracts, including franchise agreements, sale of goods contracts, supply agreements, services agreements, and leases.

A small business is one that employs fewer than 20 people at the time the contract is entered into. When determining the number of employees, a casual worker is not included unless they are employed on a regular and systematic basis.

The upfront price payable is the amount payable under the contract and that is disclosed before the contract is entered into. It does not include payment that is contingent on the occurrence or non-occurrence of an event. So an amount payable calculated as a percentage of revenue (such as royalties under a franchise agreement, or turnover rent in a retail lease) is not included in calculating the upfront price payable.

What protection is given to a small business?

The Court may declare a term in a standard form contract as unfair. Once a term is declared unfair, the Court may make an order that:

  •  Compensation is paid;
  •  Prevents or reduces any loss or damage to the contracting party; and
  •  Prevents or reduces loss or damage suffered, or likely to be suffered, by a class of persons who are not contracting parties.

 The application for an order listed above may be made at any time within 6 years after the term is declared unfair.

 A contract term is unfair if:

  • It causes a significant imbalance in the parties’ rights and obligations under the contract;
  • The term is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
  • It would cause detriment (financial or otherwise) to a party if the term was applied.

Terms that are typically included in standard form contracts and likely to be declared unfair include, but are not limited to:

  • A term that allows one party, but not the other, to change the terms of the contract;
  • A term that permits one party, but not the other, to renew the contract;
  • A term that permits one party, but not the other, to assign the contract without the other party’s consent;
  • A term that permits one party, but not the other, to vary the upfront price payable;
  • A term that permits one party to unilaterally change or substitute the goods sold or interest granted in land; or
  • A term that limits one party’s right to sue the other party.

 It is important to remember that the declaration that a term in a contract is unfair does not mean the contract becomes void. The unfair term is merely unenforceable.

 What do you need to do?

It is essential that you review any agreements you currently use or are presented with to determine whether they are standard form contracts. If they are, you should consider whether clauses which may be viewed as unfair terms are:

  • Written in plain and legible language;
  • Reasonably necessary to protect a legitimate interest (consider, for example, when last the term was relied on); and
  • Could the term be excluded from the contract without affecting the rights and obligations of the parties in performing the contract?

 We would be delighted to assist if you require any assistance with a review or amendment of any standard form contracts.