Unfair Contracts Update – are you complying with the law

The Unfair Contract Terms Regime (UCT Regime) was extended to cover standard form contracts entered into with ‘small business’ in November 2016.

The Regime is fully operational and has a significant impact on the way Australian businesses contract with each other. It is important to understand how the Regime affects your business dealings and contracts, now that it is in force.

As at the date of introduction, Australia is the only country in the world to apply this type of structure to business to business contracts.

This article provides an overview of the UCT Regime and a brief case study showing how the court has applied the reforms.

Standard form small business contracts affected

The extended UCT Regime applies to any standard form small business contract for the supply of goods and services, including financial services or products or an interest in land.

The changes brought about by the Regime also apply to franchise agreements and are in addition to existing extensive compliance and regulatory obligations under the Franchising Code of Conduct.

What is a ‘small business contract’?

A contract is a small business contract where:

• at least one of the businesses employs less than 20 people; and
• the upfront price of the contract is no more than $300,000 or $1 million if the contract length exceeds 12 months.

Even if a franchisor is a small business it is not exempt from the provisions. The UCT Regime can be used by one small business against another small business.

Although a ‘standard form contract’ is not defined, the UCT Regime does provide that a court may take into account matters such as whether one party has more bargaining power than the other party.

There is a presumption that a contract is a standard form contract unless it is proven to be otherwise.

When a document was prepared and whether there was any opportunity to negotiate the terms of the contract, as well as whether the contract was customised for the particular transaction, are also facts that may be taken into account when determining whether the contract is a ‘standard form contract’.

Negotiations in relation to price will not count as negotiations in respect of the contract for the purposes of deciding whether a standard form contract was used.

When will a term be “unfair”?

Contractual terms will be considered unfair if they cause a significant imbalance in the rights and obligations between the parties and where a term goes beyond what is reasonably necessary to protect a party’s legitimate interests.

In addition, a contractual term will be unfair if it would cause the other party financial detriment if relied upon.

Unfair terms will be void

Any term of a small business contract that is found to be unfair will be void.

The remainder of the contract will continue to operate to the extent that it is capable of operating without the unfair term. However, the whole of a contract may be lost if the contract is incapable of being fulfilled without the unfair term.

Limited exemptions

The UCT Regime provides for a limited number of exemptions for terms permitted by other laws such as the Franchising Code. However, no blanket exemption has been allowed for franchise agreements.

Multiple publications released by the Australian Competition and Consumer Commission (ACCC) have highlighted franchise agreements as being one of the key areas to be covered by the regime.

The Regime has a significant impact on and increases the considerable compliance obligations that were already placed on franchisors.

Testing the strength of the UCT Regime

The application of the UCT Regime to small business contracts was first tested by the ACCC in Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224. In this case the ACCC was successful in contending that certain terms of a waste management company’s contracts were ‘unfair’ within the meaning of s 24 of the Australian Consumer Law.

The impugned terms declared by the Federal Court as unfair, and therefore void by operation of s 23 included:

• an automatic renewal clause providing that the contract would be renewed for further five-year terms unless either party gave 30 days’ written notice before the expiration of the initial or a renewed term;
• the unilateral right for the company to vary prices during the term of the contract by providing 30 days’ written notice;
• a clause waiving liability should the company be prevented or hindered in performing the agreed services;
• a clause granting the company the exclusive right to carry out the waste services contracted, and preventing the customer from engaging another entity to carry out like services;
• a clause preventing the customer from terminating the contract unless all monies payable under the agreement were made in full and permitting the company to keep its equipment on the customer’s premises and charge for its rental if there were delays in the customer finalising its account.

Reminder

The case above illustrates the types of contract terms that will be deemed unfair under the UCT Regime. Commercial and franchisor clients are reminded to review and update standard form contracts to ensure compliance.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9274 8820 or email ch@lawbase.com.au.