Laws against 'unfair contract terms' are changing - and if you're a small business, you should listen up

We all believe that for there to be an agreement between two parties, the playing field should be more or less level.

It’s exactly why Australia has laws against ”unfair contract terms”, which apply to certain contracts where one of the parties is a small business. They’re designed to protect small businesses from being taken advantage of by more powerful organisations (for example, a supermarket issuing a take-it-or-leave-it contract to a farmer that allows the supermarket to end the agreement early, but not the farmer). If a contract is found to have such an unfair term, the term is struck out.

Or at least that’s how it used to work.

The whole regimen will become much tougher in November, and according to an expert from MV Law, Massimo Di Maio, there are a few things local businesses need to know.

First, the definition of ”small business” is changing.

For the Unfair Contract Term rules to come into effect, one of the parties needs to be a ”small business”.

That used to mean a business that employs fewer than 20 people. Under the new laws, it will change to one that employs fewer than 100 people, or has a turnover of less than $10 million. That’s a “huge jump”, Massimo says, and one that will affect “nearly every small-medium business”.

In essence, this means if your business has dealings with businesses with fewer than 100 employees or turnover of less than $10 million, these laws may apply to your contracts.

Second, the penalties are changing, massively.

Under the current rules, if a contract term is found by the courts to be unfair, it is voided. Under the new rules, the offending individual or company will be slapped with crippling penalties. For an individual, this looks like $2.5mm, and for a corporation, it will be whichever works out to be the biggest of these numbers:

1. $50m
2. Three times the value of whatever you got from having the unfair term, if the court is able to assess that – and if it can’t
3. 30 per cent of the adjusted turnover during the breach turnover period of the offence, act or admission (which is a minimum of 12 months before the breach).

However, the laws only apply to ”standard-form contracts”. What is a standard form contract?

Massimo says it’s determined by the courts on a case-by-case basis, but there are a few things they must consider when assessing whether a contract is a ”standard form contract”. For instance, if it’s a procedural, ”copy and paste” contract that’s been used before, with little to no negotiation from the other party, there’s a good chance that it may be a standard form contract.

The negotiation can’t just be a token, either.

“You can’t just say, ‘Oh, I’ve negotiated on some terms’ – if they’re not really material or substantial in effect, then the court may still say it’s a standard form contract,” Massimo says.

“A party that normally in the course of business issues documents to other parties as part of their business procedure, they should be concerned and looking at minimising the risk of non-compliance as much as possible.”

And doing so well before 10 November.

Massimo Di Maio is a partner and expert in contract law at local law firm MV Law. MV Law can assist local businesses in ensuring their contracts are up to scratch before the new laws come into effect on 10 November.

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