Tuesday, 22 November 2016

Unfair contract terms regime

The long-awaited laws protecting small businesses from unfair terms have taken effect across Australia. As of 12 November 2016, any terms that are ‘unfair’ in new or renewed contracts could be deemed void and unenforceable. While we are yet to see how the courts and tribunals will interpret this new legislation, the ACCC released a report last week providing a breakdown of some common worrying terms identified in the advertising, telecommunications, retail leasing, independent contracting, franchising, waste management and agriculture industries. The report provides practical guidance on how businesses can comply with these new laws including practical examples of the kinds of changes the ACCC recommends businesses make. 

What contracts are affected?
The new legislation covers standard form small business contracts. More specifically:
  • contracts for the supply of goods, services, financial services or financial products or a sale or grant of an interest in land
  • that are entered into or renewed on or after 12 November 2016 (including variations and automatic or periodic rollovers)
  • where at least one of the parties is a business that employs less that 20 people (including casual staff employed on a regular or systematic basis)
  • where the contract is considered to be a ‘standard form contract’ i.e. it has been prepared by one party to the contract and is not subject to negotiation between the parties (offered on a ‘take it or leave it’ basis), and
  • the upfront price payable under the contract does not exceed $300,000 (or $1 million if the contract is for more than 12 months). 

What kind of terms will be considered ‘unfair’?
To be ‘unfair’ under the Australian Consumer Law (ACL) a term must:
  • cause a significant imbalance in the parties' rights and obligations arising under the contract
  • not be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term (nb this is presumed unless the advantaged party proves otherwise), and
  • cause detriment (financial or otherwise) to a party if it were to be applied or relied on.

A term must satisfy all three elements to be deemed unfair. In making a determination, a court or tribunal must consider the transparency of the term (i.e. is it expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term) and the contract as a whole.

ACCC’s report
In preparation for the laws taking effect, the ACCC examined standard form contracts across a range of industries and identified a number of terms that are likely to raise concerns in all contracts, as well as those in specific industries.

The most commonly-occurring problems in the reviewed contracts, across all industries, were terms that allowed the contract provider:
  1. To unilaterally vary all terms (or at least those that have a significant bearing on the contractual arrangement, or which could cause detriment if varied) in an unconstrained manner. The ACCC recommended removing these terms or balancing them with a reasonable notice period and a right to end the agreement if the small business does not agree to the variation.
  2. Potentially broad and unreasonable powers to protect themselves against loss or damage at the expense of the small business by imposing broad indemnities or excessive limitations of liabilities. The ACCC considers that these terms should only be used to the extent reasonably necessary to protect the larger business’s legitimate interests, and
  3. An unreasonable ability to cancel or end an agreement as it suits them. The fair position will depend on the circumstances but the ACCC recommends that contract providers should generally give small businesses the right to rectify a breach, increase the length of an existing rectification period, and limit grounds for termination to those that are reasonable. 

The ACCC considers such terms are likely to raise concerns under the unfair contract terms law because, in most circumstances, they will go beyond what is reasonably necessary to protect a business’s legitimate interests.

In a number of specific industries the ACCC found that automatic rollover clauses, while not necessarily unfair, could be reason for concern. To ensure they are enforceable under the new regime, the ACCC recommended ensuring small businesses receive reasonable notice that the contract is about to renew and the ability to exit the renewed contract without penalty. Further, early termination charges in the telecommunications contracts are also predicted to be deemed unfair, unless they reflect a genuine estimate of the carrier’s losses if a customer terminates their contract.

Next steps
The ACCC has strongly encouraged all businesses to review their standard form contracts for clauses that may be considered unfair under these new laws. If you would like any further guidance on this, or are concerned about any specific contracts or clauses, please contact us immediately as enforcing these laws will be a priority for the ACCC in the near future, particularly for the kinds of clauses flagged above.

The consequences of not updating your contracts could be significant. If a limitation or exclusion of liability clause is found to be void, this means rather than capping or excluding liability, your contract will leave you with unlimited liability.

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