29 October 2016
Fair to become the new standard for small business contracts - Sydney Morning Herald
By Kate Carnell
In about two weeks’ time, a significant – but relatively little known – law will come into place that will help level the playing field for small businesses when entering into contract negotiations with larger companies.
When a small enterprise enters into an agreement with a bigger business, it’s often finalised using what’s called a ‘standard form contract’. On average, small businesses enter into about eight of these kinds of contracts a year.
The problem however is that a standard form contract typically leaves small business with no choice but to accept the terms as presented to them, with no room to negotiate any changes; in other words, they can either ‘take it or leave it’.
In this David and Goliath-type scenario, most small businesses often don’t have the luxury to just ‘leave it’, so they are forced to ‘take it’ warts and all. Many small businesses have been stung by this practice; almost two thirds of small businesses claim to have experienced unfairness in the contract terms and conditions they’ve signed up for under a standard form contract. Worse still, almost half of small businesses report experiencing harm as a result.
The good news though is that there is help on the horizon which promises to be a game-changer in this space; small businesses will soon enjoy a new level of protection that will restore some balance to the bargaining process.
Starting from November 12, a new law – to be administered by the ACCC and ASIC – will allow a court or tribunal to strike out a term within a standard form contract, if it’s found to unfairly benefit one party over the other (in other words, if the contract term benefits Goliath over David).
The unfair contract term law will cover business-to-business contracts where one of the businesses employs less than 20 people, and the contract is worth up to $300,000 in a single year (or $1 million if it runs for more than a year).
There are a range of examples that could raise concerns under the law, including terms that only give power to one party to terminate the contract, terms that penalise only one party for breaching the contract, terms that enable only one party to avoid their contractual obligations, or terms that only allow one party to alter the terms of the contract.
So what does this all look like in practice I hear you ask; one example that many will relate to is a contract between a small business and their internet service provider. A term that gives the service provider the right to increase its prices – without prior notice – but does not allow the small business to end the contract, could be considered unfair.
Another example of a potentially unfair contract term is one that allows a franchisor to terminate a franchise agreement at any time, even if the other party has always held up their end of the bargain.
Or it might be the case that a small business enters into a contract with a big business supplier to buy building materials for example. Under the contract terms, if the big business fails to supply the materials by the specified deadline, the small business may have the power to terminate the contract, but if it does, it will lose its deposit on the materials.
Tens of thousands of standard form contracts could potentially be affected by these changes, so if you’re a small business on the cusp of entering or renewing a standard form contract, just bear in mind that you won’t have any recourse to take action – under the new law – against a term you think stinks, until November 12.
While only a court or tribunal has the power to deem a term unfair after November 12, any disputes that a small business may be having in regards to a particular contract term (before and after November 12), may also be resolved through dispute resolution services, and as always, our office stands ready to help any small business that finds themselves in this situation.