September 16, 2016

How to get ready for the arrival of new unfair contract laws

New laws will soon protect small businesses from unfair terms in standard form contracts. Philip Trinca, a partner at law firm Ashurst, discusses the impact of the changes.

Soon small business will be able to challenge any terms they consider to be unreasonable in a standard form contract. Philip Trinca, a partner at global law firm Ashurst, outlines the new laws and what business owners should be doing now to ensure they’re prepared.

New laws that take effect on November 12 this year will protect small businesses from unfair terms in standard form contracts.

“Standard form contracts are those which are prepared in advance and offered on a ‘take it or leave it’ basis,” says Philip Trinca, a partner at global law firm Ashurst. “Over the years, some business owners, or lawyers acting on their behalf, have included terms which have unreasonably skewed the balance in favour of the person drafting the contract. If these kinds of terms are included in contracts drawn up or renewed on or after November 12 they will be open to challenge by the other party.“

If a court or tribunal decides that a term is unfair it will be void, or no longer binding.

“In most cases this will be as far as the action goes,” says Trinca. “However, if the unfair clause is fundamental, it could bring the whole utility of the contract into question.”

Where the law applies

The new laws will only cover contracts where at least one of the parties is a small business – one that employs fewer than 20 people on a regular basis. The upfront price payable under the contract must also be no more than $300,000, or $1 million if the contract runs for more than 12 months. Importantly, the new regime will not cover the terms that set the upfront price payable.

The laws provide examples of terms that may be unfair, including those that:

  • enable one party, but not another, to avoid or limit their obligations under the contract
  • enable one party, but not another, to terminate the contract
  • penalise one party, but not another, for breaching or terminating the contract
  • enable one party, but not another, to vary the terms of the contract

What should you do now?

If you are entering into a standard form contract it’s important to be aware of your rights. Check it over as usual and remember that the new laws will apply only to contracts drawn up on or after November 12th or to terms varied on or after this date. If you believe that any of the terms are unfair in a contract that meets these criteria you can point this out and, perhaps, refer the other party to the new laws. They may decide to remove or amend them.

If you have drawn up your own standard form contracts you must be aware of your obligations and also any possible risk. Read through all of your contracts to identify any potentially controversial clauses. If you’re not sure what action to take, Trinca suggests asking yourself three questions.

  1. Is the clause so important that you would be willing to defend it? If this is the case, you need to feel confident that, if someone took action against you, you would you be able to convince a court or tribunal that there’s sufficient commercial need for you to rely on the clause.
  2. Does the clause introduce a level of risk and vulnerability that warrants amending the contract?
  3. Is the clause both risky and unnecessary, so that the best course of action would be to delete it?

“You and your lawyer should discuss whether, in simple terms, you should you defend, amend or delete any term that might be considered unfair,” says Trinca.

Where to get advice

A lawyer will be the person to turn to for advice.

“If you have an industry group or association you might also want to check whether they’re putting out guidance as to terms the industry relies on that might be challenged,” says Trinca. “They may also be discussing their guidance with the government.”

Disclaimer: This article is not intended to be comprehensive nor does it constitute legal advice.

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