New laws were passed by the Federal government last month offering protection to small businesses from entering into unfair contracts. The laws apply from next year to businesses that employ less than 20 people, and the contract is worth up to $300,000 in a single year or $1 million if the contract runs for more than a year. The new laws will be enforced by the ACCC, Australian Securities and Investments Commission and state and territory offices of fair trading.
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ACCC deputy chairman Dr Michael Schaper says there are four unfair contract clauses which are likely to be caught by the new laws:
- enabling one party (but not another) to avoid or limit their obligations under the terms of the contract;
- enabling one party (but not another) to terminate the contract;
- penalising one party (but not another) for breaching or terminating the contract;
- enabling one party (but not another) to vary the terms of the contract.
Dr Schaper says there are specific types of contracts most likely to feel the effects of the new laws. “The industries that we think there will be a particular focus are advertising contracts, telcos, small business franchising contracts, commercial leases and potentially independent contracting arrangements.”
The laws may catch out franchisors who use standard contract forms to sign up franchisees. Typically a standard form contract is not subject to negotiations between the parties, in this case the franchisee and franchisor, and is offered on a ‘take it or leave it’ basis. Other elements of a standard form contract can be if the contract is prepared by (in franchising) the franchisor, before any discussion with the franchise buyer or where the terms of the contract do not take into account any particular characteristics of the franchise buyer or the transaction itself.
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It’s important for small businesses to understand that the new laws may only require sections of a contract to be potentially struck out, rather than the entire contract. A court will read the term(s) in the context of the entire contract and will also take into consideration the transparency of the contract, that is, how upfront, easy to read and clearly presented the contract is to the affected party.
Dr Schaper says the ACCC has not received many inquiries yet but once the watchdog starts enforcing the legislation this is likely to change.
“Once the new law comes in and we start winning a few court cases you will see a whole lot of other ones making sure they comply,” he says.
Small Business Minister Kelly O’Dwyer says:”Certainly I know there are businesses that have gone to the ACCC already to see if contracts have unfair terms.” She also says that the news laws are an extension of consumer protection laws, covering small businesses who up until now enjoyed very little protection from unfair contracts.
Peter Strong, chief executive of the Council of Small Business of Australia, says it will take a while after the legislation is implemented for small businesses to review their contracts. He expects the legislation will result in a “profound change” to the stress levels of small business owners.
“I don’t think it’s protection for small business; it’s just fairness,” he says. “It’s levelling the playing field. It removes that likelihood of franchisors and landlords, in particular, to ride roughshod over people.”
Particular attention should be paid to entering into contracts with small businesses that may lack the resources or skills to fully understand the implications of contract terms or where it appears that one party has all the bargaining power in the contractual relationship.
We always encourage individuals and businesses to seek independent legal advice before entering into any contract, especially when it’s a standard form and there is no capacity to negotiate the terms of the contract. Examples of these types of documents include a commercial lease, a real estate contract, and a franchise agreement.
You should immediately be wary of any party who insists you must sign a contract immediately or doesn’t want you to seek independent legal advice. It may be because they don’t want you to know about terms within the contract that are unfavorable to you.
If you have any questions about contracts or are about to sign a contract, please contact us for your FREE, 10-minute phone consultation.