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Is your standard form contract enforceable? New unfair contracts regime for small business to take effect 12 November 2016

28 October 2016

The new unfair contracts regime, implemented through the Treasury Legislation Amendment (Small Business & Unfair Contract Terms) Act 2015 (the Act), will take effect from 12 November 2016.

The Act extends the existing unfair contracts regime under the Australian Consumer Law (as set out in Schedule 2 to the Competition and Consumer Act 2010 (Cth)) and the Australian Securities and Investment Commission Act 2001 (Cth) which previously related only to “consumers”, to contracts involving a “small business”.

“Small business” contracts are contracts in which:

  1. At the time the contract is made, one of the parties (or more) is a business which employs fewer than 20 people (including casual employees if employed on a regular or systematic basis).
  2. The upfront price of the contract does not exceed $300,000 (or $1,000,000 if the contract is for more than 12 months).

The effect of these changes will be that a term of a small business contract (or consumer contract) will be void if a) the term is unfair and b) the contract is a standard form contract. As the transport and logistics industry depends to a large extent on standard form contracts and many operators/contractors potentially fall within the small business category, it will be important to understand what terms within the various standard form contracts could potentially be declared void for unfairness by a court and therefore held to be unenforceable.

Significantly, it is also important to consider whether or not a void unfair term can be carved out of the contract and if it is carved out whether it will render the entire contract voidable/unenforceable.

“Unfair” terms are defined as terms that:

  1. Would cause a significant imbalance in the parties’ rights and obligations arising under the contract.
  2. Are not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.
  3. Would cause detriment (whether financial or otherwise) to a party if the term were to be applied or relied on.

Some examples include unilateral one-sided termination for convenience clauses and clauses allowing one party to unilaterally vary the terms of the contract. Although not expressly provided for in the legislation, it is likely a court would also look unfavourably on clauses which seek to exclude altogether one party’s liability even in circumstances of gross negligence, for example.

We note there are some contracts in the transport sector which will be exempt from this regime, including:

  1. A contract of marine salvage or towage.
  2. A charterparty of a ship.
  3. A contract for the carriage of goods by ship.

In light of the above, it will be important for all operators, big and small, to review their standard terms and conditions to determine which clauses may be susceptible to being voided under this regime and how this may affect their risk profile.

HFW has significant experience in undertaking contract reviews of a range of standard terms and conditions in the logistics and transport sector. We would be happy to be of assistance.

John Court
Global Director of Information Technology