Unfair terms threaten business contracts

All small businesses across the country could find themselves left with defective contracts if they fail to recognise an amendment to Australian Consumer Law, according to leading Brisbane law firm Paxton-Hall Lawyers.

The little noticed amendment, regarding unfair contract terms legislation, was passed in October last year and is beginning to trap businesses who are yet to appropriately update their standard form contracts.

Business Contract

The amendment aims to stamp out terms that are not transparent and clearly understood, as well as those that give significant rights to one party and not to the other.

Paxton-Hall Lawyers Special Counsel Robert Cunningham said things like the fine print on contracts were at risk of not complying with the legislation.

“Long sets of small print conditions on the back of a contract that nobody reads won’t stack up anymore,” Mr Cunningham said.

“Terms allowing one party and not the other to terminate the contract, to vary the terms of the contract, to penalise the other party or to assign the contract will also have trouble holding up.”

Mr Cunningham said the fact all commercial dealings were contractual meant every transaction, where there is a standard form contract and a small business is involved as either buyer or seller, was affected by this legislation.

“If a company’s contract terms are unfair, they are void, totally unenforceable in any of the standard contracts they have pumped out,” Mr Cunningham said.

“And because it’s in a standard form contract, all the other contracts in that form will have the same problem, which means the seller may not be able to conduct its operations as it had envisaged when preparing the contract.

“Then anyone who entered such a contract can apply for their money back to the extent it was taken under an unfair term.”

Mr Cunningham said this amendment would be a shock for smaller operators as previously, the legislation had only applied to contracts where one party acquired goods for personal or household use.

The legislation now applies to contracts where one party is a business employing fewer than 20 people and either the upfront price is $300,000 or less, or the contract lasts more than 12 months and the upfront price is $1m or less.

The legislation will affect contracts entered into or renewed from 12 November 2016.

But it’s not all doom and gloom as the legislation may also work in favour of a business.

“Let’s take a software licence for example, if the licence gives the provider the power to increase licence fees unilaterally without the licensee having a right to terminate the arrangement, the clause is likely to be void and the provider could not increase the price under this provision,” he said.

“They may also have to refund any money paid by customers under that unfair term, and because it is in a standard form contract, there could be many licensees, resulting in a huge sum of money to be repaid.”

Mr Cunningham urged business owners to review their current contracts before the transition period expired in November or risk being left to deal with these unenforceable agreements.

“Early in the new year is a good time to think critically about the operation of your business for the working year ahead,” he said.

“It might seem like a menial task but the consequences for disregarding it are too drastic to ignore.”

The kinds of clauses that are most likely to fall foul:

  • Where one party— but not the other party—has a right to terminate expressed in the contract
  • Where one party can vary the price at will
  • Where one party can vary the specifications for the goods or services, or the date of delivery
  • Where the clause itself not “transparent” or is part of a document which, in total, is not “transparent”