Progress made towards a fairer distribution of power between small and big businesses

unfair contracts

When small businesses engage with large enterprises, standard form contracts often leave them with no room to negotiate. Small businesses are left with the choice of either accepting terms heavily weighted against them, or terminating a deal that would be valuable for their business.

To protect small businesses from backing into a corner, the unfair contracts laws were introduced in November 2016, prohibiting unfair contract terms in small business standard form contracts.

The unfair contract term laws allow for clauses within standard form contracts to be considered as void and unenforceable if found to be unfair by a court or tribunal. If considered void, the court may:

  • Grant an injunction
  • Make an order providing redress to the small business
  • Make any other order the court deems appropriate

In order to determine whether clauses are unfair, businesses must first ascertain if the contract is:

  • a standard form contract that is presented on a ‘take it or leave it’ basis such that the contract is not negotiated between the parties
  • an arrangement where one party employs less than 20 people
  • entered into after 12 November 2016, or renewed after that date
  • a contract under the contract value threshold of $300,000 for a one-year contract, or under $1 million for a multiple year contract
  • a term not excluded by the Australian Consumer Law, such as those which set the upfront price payable
  • an arrangement where there is an imbalance in the parties’ rights and obligations arising under the contract.
What does the law mean for small businesses?

The problem caused by standard form contracts has been very real for Australian small businesses. The ACCC states that 60% of small businesses claimed to have experienced unfairness in terms and conditions and 44% of small businesses reported experiencing harm as a result of unfair terms.

Consequently, the ACCC has listed enforcing the unfair contract terms law and ensuring that small businesses receive the protection of the unfair contract terms law as one of their enforcement priorities in 2017.

Sensis recently made headlines for failing to disclose that the 12-month minimum advertising contracts for the Yellow Pages and White Pages directories would automatically renew for a further year, if not explicitly cancelled. Customers faced cancellation fees equivalent to the cost of the remaining contract if they cancelled the renewed contract after a given date.

Following the ACCC’s investigations and to address ACCC’s concerns, Sensis has provided a court-enforceable undertaking to refund customers, publish a notice on its website and agree to modify terms in its contracts in order to comply with the new law. As a result of this investigation, Sensis has amended its processes to ensure that its customers are made aware of its automatic renewal and cancellation processes and that customers are reminded of pending automatic renewal of their contracts.

Avoiding similar pitfalls

Small businesses should ensure that they are aware of the types of terms that may be considered as unfair. If they feel that a clause or various clauses in the contract fall into this category, they should always try to negotiate and resolve the issue with the other party. Disputes over whether clauses are unfair may also be resolved through an industry ombudsman or a dispute resolution scheme.

If the dispute remains unresolved, small businesses may commence proceedings in the state and territory respective civil and administrative tribunal. Small businesses that are considering commencing proceedings in the Supreme Court for a declaration that a contract term is unfair should seek legal advice.

Small businesses are also able to lodge a complaint with the ACCC who may commence an enforcement action pursuant to their Compliance and Enforcement Policy. The Australian Securities and Investment’s Commission (ASIC) enforces the unfair contract terms law in relation to financial products and services.

This change shows real progress towards balancing the distribution of power between small businesses and large enterprises in standard form contracts.

In many situations, small businesses lack the capacity or legal experience to closely examine contracts. This is illustrated by the fact that 30% of businesses spend under nine minutes reviewing standard form contracts before signing them.

To benefit from the small business unfair contracts legislation, which has provided some clarity as to what may be considered as unfair contract terms, small businesses should review all standard form contracts before signing them to ensure that none of the terms are unfair. If small businesses believe that a contract term is unfair, they should try to negotiate and resolve the issue with the other party.


About the author

Myfanwy Wallwork is Executive Director for Regulatory Compliance at LexisNexis Pacific, a provider of content and technology solutions for professionals in the legal, risk management, corporate, government, law enforcement, accounting and academic markets.