30 May 2016

From 12 November 2016 new law will protect small businesses from unfair terms in standard form contracts.

This legislative change will only apply to contracts signed on or after 12 November 2016. If your client is putting pressure on you to sign before this date, this may be the reason why and you may want to consider whether it is in your best interest to do so.

To obtain the benefit of this legislative change you must meet the following criteria:

  • Be a small business with less than 20 employees;
  • The value of the contract must be less than $300,000 (where the contract will run for less than 12 months);
  • The value of the contract must be less than $1 million (where the contract runs for more than 12 months); and
  • The contract must be a standard form contract (for example a contract offered on a “take it or leave it” basis).

To determine whether a contractual term is unfair, the Court or Tribunal will need to ascertain whether the specific term causes a significant imbalance between the parties, whether the term is reasonably necessary and whether a party will suffer detriment if the clause is relied upon.

The ACCC has listed a number of examples where terms have been held to be unfair in consumer contracts. If this legislative change applies to you, you may be able to successfully make a claim that a term in a standard form contract is unfair and void where the contractual term:

  • Enables one party (but not another) to avoid or limit their obligations under the contract;
  • Enables one party (but not another) to terminate the contract;
  • Penalises one party (but not another) for breaching or terminating the contract; or
  • Enables one party (but not another) to vary the terms of the contract.

Based on the above examples, this legislative change will undoubtedly call into question the validity of one sided indemnity clauses and proportionate liability waivers in standard form contracts.

From a risk management perspective you should not rely on this law to ‘save the day’ in the event of the claim. We suggest that you continue to negotiate amendments to clauses which create insurance risks so you do not have to go to the expense and uncertainty of litigating a contract under this as yet, untested law.

You should also remember that an unfair contractual term will not invalidate the entire agreement it will merely void the clause in question.

Belinda Davis – Risk Management Department