12 September, 2016

Australia Update: New unfair contract term protections effective on 12 November 2016

Australia Update: New unfair contract term protections effective on 12 November 2016

Are you ready for the 12 November 2016 deadline to comply with changes to the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Australian Consumer Law (ACL)?

On 12 November 2016, amendments to the ASIC Act and the ACL will commence. These amendments will extend the unfair contract term provisions currently available to consumers to small businesses that enter into standard form contracts valued at less than a prescribed threshold. Where the legislation applies to a “standard form contract” and that contract has a term that is “unfair”, the term will be unenforceable.

What is a “standard form contract”?

A “standard form contract” is generally one that has been prepared by a party and is provided to the other party on a “take it or leave it” basis with little opportunity to negotiate the terms of the contract.

The new legislation will apply to a “standard form contract” that is entered into, renewed or varied after 12 November 2016 where the following conditions are met:

a) the contract is for the supply of goods, services, financial products or financial services or the sale or grant of an interest in land;

b) at least one party to the contract is a business that employs fewer than 20 persons (including casual employees employed on a regular and systematic basis); and

c) the upfront price under the contract does not exceed either $300,000 (for contracts of no more than 12 months) or $1 million (if the contract has a duration of more than 12 months).

The legislation will not apply to certain contracts, including contracts entered into before 12 November 2016 (unless renewed or varied on or after this date), constitutions of companies, managed investment schemes or other kinds of bodies, shipping contracts and certain insurance contracts (for example, car insurance). The legislation will also not apply to small business contracts that are covered by Commonwealth, state or territory laws that are prescribed by the regulations (no such laws are prescribed as yet).

What contract terms may be unfair?

Under the new legislation, a term of a contract will be unfair if it:

a) would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

b) is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

c) would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

For example, an unfair term may be a term that enables one party (but not another):

  • to avoid or limit their obligations under the contract;
  • to terminate the contract; or
  • to vary the terms of the contract.

Similarly, an unfair term may be a term that penalises one party (but not another) for breaching or terminating the contract.

However, terms that define the main subject matter and upfront price payable under a contract (where the price is disclosed at or before the contract is entered into) cannot be declared unfair.

If a contract term is determined to be unfair, the term will be void (i.e. unenforceable). Once declared void, the contract will only continue to bind the parties if the contract can operate without the void term.

Next steps

Given the imminent deadline, businesses should (if have not already done so) review any standard form contracts that will be subject to the new legislation and consider amending or removing any terms that might be considered “unfair”.

Small businesses employing less than 20 people should also consider the impact of the new legislation when deciding whether to enter into a standard form contract prior to 12 November 2016. If a small business would like the new protections to apply to a contract, it may be strategically advantageous to delay entry into the standard form contract until after 12 November 2016 or renewing a contract after 12 November 2016 to ensure the existing contract is caught by the new law.


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