The New Unfair Contracts Regime (explained)


The New Unfair Contract Laws came into effect from 12 November 2016.

The amended Australian Consumer Law changes contract law as we know it.

In a Nutshell

Simply put, a contract term may be declared void if:

  1. The contract is a standard form small business contract for the supply of goods and services or the sale or grant of an interest in land;

  2. the upfront price is less than $300,000 including GST or $1 million if the term is more than 12 months; and

  3. the term is unfair.

The law will affect all manner of commercial contracts including:

  • Commercial Leases;

  • Franchise Agreements;

  • Off the Plan Contracts; and

  • Financial agreements, loan agreements and, mortgage documents

Examples of Potentially Unfair Terms in Practice

Terms that may be targeted as unfair include terms that:

  • limit or extinguish your right to make a claim for compensation;

  • make a guarantor liable even if the lessee or franchisee ceases to be liable;

  • require you to indemnify a landlord even if the landlord causes the damage;

  • grant access rights without your consent;

  • gift tenant’s property to the lessor at the end of the lease;

  • force you to state that no promises or representations have been made about the commercial transaction; and

  • appoint the lessor/franchisor an attorney of the lessee/franchisee if there is default under the agreement.

Consequences

Unfair terms in small business contracts will be void.

However the contract will continue to bind the parties, but without the unfair term.

If a party attempts to enforce a term which is declared to be unfair, then a court can award the other party compensation.

At present there is some uncertainty as to how the laws will apply to these agreements which affect hundreds of thousands of businesses operating in Australia.

Our recommendation is to give the other party a reasonable and robust opportunity to negotiate the terms of the contracts.

In practice, commercial leases are subjected to robust negotiation and it could be argued this prevents the new laws from applying.

However contracts that are “take it or leave it” contracts (e.g. mortgage/finance/franchise agreements) and are likely to be caught and subject to challenge.

Consumer Contract v Small Business Contract

Under the Australia Consumer Law there are protections to consumers who enter into a “Consumer Contract”.

A Consumer Contract is a contract for the supply of goods or services or a sale or grant of an interest in land to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

If the Consumer Contract contain unfair terms, and is a “standard form contract”, those terms can be declared void.

The new legislation now applies to standard form small business contracts.

A highlighted difference between a Consumer Contract and a Small Business Contract is that the provisions apply whether the small business is the supplier of goods or services or the acquirer of such goods or services. In a Consumer Contract the unfair contract terms apply only when the individual acquires the goods or services.

Specifics of the Elements

The elements to be satisfied are:

  1. the term is unfair;

  2. the contract is a standard form contract;

  3. the contract is either a Consumer Contract or a Small Business Contract

What is an Unfair Term?

Section 24 of the ACL can be summarised as saying that a term is unfair if:

  1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract: and

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

  3. it would cause detriment to a party if it were to be applied or relied on.

A court will take into account:

  1. the extent to which the term is transparent; and

  2. the contract as a whole.

A term is transparent if the term is:

  1. expressed in reasonably plain language;

  2. legible:

  3. presented clearly and

  4. readily available to any party affected by the term.

Section 25 of the ACL gives examples of unfair terms. These are terms where one party has all or most the bargaining power, and the other party does not. Unfair terms include terms that:

  1. permit one party but not the other to avoid or limit performance of the contract;

  2. permit one party but not the other to terminate the contract;

  3. penalises one party but not the other for a breach or termination of the contract;

  4. permits one party but not the other to vary the terms of the contract;

  5. permit one party but not the other to renew or not renew the contract;

  6. permit one party to vary the upfront price without the right of another party to terminate the contract;

  7. permit one party unilaterally to vary the characteristics of the goods or services supplied or the interest in land to be sold or granted under the contract;

  8. permit one party unilaterally to determine whether the contract has been breached or to interpret its meaning;

  9. limits one parties vicarious liability for its agents;

  10. permits one party to sign the contract to the detriment of another party without that other party’s consent;

  11. limits one parties right to sue the other party;

  12. limits the evidence one party can induce in proceedings relating to the contract;

  13. imposes the evidential burden one the other party; and

  14. are prescribed by the regulations which the Governor-General has power to make.

Burden of Proof

It is up to the advantaged party to prove that the term is reasonably necessary in order to protect the advantaged party’s legitimate interests.

What is the Upfront Price?

The upfront price is the consideration (usually an amount of money) that is provided for under the contract grant and is disclosed before the contract is entered into.

What is a Standard Form Contract?

A contract will be presumed to be a standard form contract unless the other party to the proceedings proves otherwise.

In determining whether a contract is a standard form contract a court must take into account the following:

  1. whether one of the parties has all or most of the bargaining power relating to the transaction;

  2. whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;

  3. whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;

  4. whether another party was given an effective opportunity to negotiate the terms of the contract; and

  5. whether the terms of contract take into account the specific characteristics of the other party or the particular transaction.

What is a Small Business Contract?

A small business contract means a contract where:

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

  • at the time the contract is entered into, at least one of the parties employed fewer than 20 persons; and

  • the upfront price payable under the contract does not exceed $300,000 for contracts shorter than one year or $1 million for contracts that have duration of more than 12 months.

Determination requires an Application to the Court

Declaring a term unfair would require an application to the court by the small business or ASIC.

Contracts Exempted from the Regime

The laws do not apply to these types of contracts:

  1. a contract for marine salvage/towage;

  2. charter party of a ship;

  3. contracts for carriage of goods by ship; and

  4. the constitution of a company or managed investment scheme.

Conclusions

The law of contract as we know it has changed dramatically. Countless contracts are now affected Australia wide.

If a term was subject to negotiation, it is less likely that it will be considered to be an unfair term. It would probably be the case that a contract with negotiated terms would not be found to be a standard form contract.

The provisions are complex and we will have to wait and see how business and negotiation practices will change in the future.

For more information contact Evan Sarinas on 0418150111 or esarinas@sarinaslegal.com.au

Disclaimer

This publication is intended as general information only and not specific legal advice. All liability is specifically disclaimed for reliance on same. Seek professional legal advice.

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