Does your business use a standard form contract?
Beware! Changes are around the corner.
The big end of town has been using standard form contract for years. Australian consumers have been able to challenge them for over 5 years, but small business has been powerless to do so – up to now.
Standard Form Contracts are not new
They are not a 21st century creation. They have been around since the 1600s, but parliament has recently put them under the spotlight.
The problem is that in this day and age, many consumers and indeed many small businesses see the standard form contract as enabling one-sided provisions to be imposed leaving little or no recourse to the weaker party. Unfairness abounds. How many times have you tried to negotiate the terms of a mobile phone contract, an equipment rental contract, a snow-ski hire contract? Never! Because you know that the answer will be “take it or leave it!”.
Australian Consumer Law is way behind
For over 5 years, the Australian Consumer Law has provided that a Court may decide that a standard form consumer contract is unfair and therefore void.
But in 2014, a review reconsidered the status of small businesses as suppliers and consumers in their own right and their lack of resources which often led to instances of unequal bargaining power. The review concluded that small businesses do not have the same level of bargaining power as larger businesses and the idea of extending the unfair contract protections which consumers already enjoyed to small businesses was borne.
Standard Form Contracts of large and small businesses
Of course, it is not just any standard form contract of the big end of town that can be challenged by small business. The protection extends to any standard form contract proposed by any business – large or small – which imposes unfairness on the small business buying the goods or services of the supplier.
That means that standard form contracts of equipment lessors, niche small business suppliers of goods or services, lenders of last resort, builders, car rental companies, car hire purchase companies, retail lessors, as well as well as, for example, franchisors, accommodation suppliers, professional service suppliers (like dentists), publishers, healthcare suppliers, and smaller educational institutions may well be challenged.
Up until now, the only remedy for small businesses when faced with unfair terms in a standard form contract was to make a claim for unconscionable conduct under the Australian Consumer Law. But unfairness and unconscionability are not synonymous ( FCA 368). It was costly and very often the outcome was uncertain.
When does the new law start?
The Treasury Legislation Amendment (Small Business and Unfair Contract terms) Act 2015 (the Act) commences 12 November 2016. It extends to businesses, the unfair contract term protections that are currently available to consumers.
What is a small business?
Small business means any business with less than 20 employees. It is not retrospective but it will capture existing contracts that are renewed or varied after that date.
What is a standard form contract?
There is no specific definition, but these are some of the issues that the Court looks at:
1) One party has most or all of the bargaining power. Do you want a new telephone landline or don’t you?
2) The contract was prepared by one party before any discussion relating to the transaction occurred. This is my real estate agency sale agreement to sell your property. Just sign here….
3) A party was required to accept or reject the terms of the contract in the form they were presented. These are our purchase terms. I have deleted clause 37 because the turnover of your business is less than $1m. You just have to sign on page 24.
What does unfair mean?
The issue is that you cannot challenge a contract merely because it is a standard form contract. It has to have one or more terms which are unfair. There are a number of issues to take into account, but the main one is that there must be one or more terms which are not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the terms.
Other issues to be aware of
In considering whether a term is unfair, the Court must take into account the transparency of the term. Is it expressed in plain language? Is it legible? Is it clearly presented or is it readily available?
Small business contracts
The Act applies to all circumstances where at the time the contract is entered into, at least one party is a business that employs fewer than 20 people and either (i) the upfront price payable under the contract does not exceed $300,000, or (ii) if the contract is for more than 12 months, then the upfront price payable under the contract does not exceed $1m.
In determining how many people are employed in a business, the Act uses the headcount method. It does not refer to “full time equivalents” and casual employees are not counted unless they are employed on a regular and systematic basis.
An upfront price is the amount that is provided for the supply or sale under the contract and it must be disclosed at or before the contract is entered into. But it does not include a cost which is dependent on the occurrence or non-occurrence of a particular event.
What can you do?
A small business can seek orders that a term is unfair. The unfair term can be severed from the rest of the contract to the extent that the contract can operate without the term. The small businesses can also ask the Court for an injunction, a pecuniary penalty or a compensation order.
Proving your case
The Act provides that the Court must presume the contract is a standard form contract, unless proved otherwise. That makes it easier for the small business owner to pursue its claim.
What do I do now?
As the Act applies to any Standard Form Contract which is unfair, small business operators should be aware of their rights to challenge unfair standard form contracts which they receive from their suppliers – and also their responsibilities towards other businesses.
This means that they should review their own contracts and double check that they themselves will not be caught, or be subject to a Court application by a disgruntled customer.
If you want your standard form contracts checked for unfairness provisions, or you think that one of your suppliers is pushing you into an unfair standard form contract that you cannot properly negotiate, then call Leigh of Leigh Adams Business Lawyers on 02 99640022. We get you there.