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Unfair Terms in Business-to-Business Contracts

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16 Jul 2015

Early in 2016, new Australia-wide laws for business-to- business (B2B) contracts will be introduced which will render ineffective terms in those contracts which are defined as “unfair”.

This change in the law will vastly expand the scope for small business customers to vary, and possibly even exit, contracts with other businesses, whether small or large.

This development represents an extension to business customers of the rights retail consumers already have under the Competition & Consumer Act 2009 (and, in the case of financial services and credit contracts, under the ASIC Act 2001).

A “small business” will be defined as one which has less than 20 full-time/permanent casual employees at the time of signing the contract.

Also the value of the contract must be not more than $100,000 over a term of 12 months, or not more than $250,000 if the term exceeds 12 months.

Further, the contract must come within the definition of “standard form”. This basically means that the contract is pre-printed, and is presented to the small business customer basically on a “take-it-or-leave-it” basis. In other words the most common type of business contract in current use.

The new laws define when a contractual term will be deemed unfair, but the definition is subjective, meaning there will be scope for argument, quite likely leading to uncertainty and delay in performing the contract.

Also, if a dispute about an unfair term gets to a court or a tribunal, the judge, in order to determine the unfairness, will be looking at additional factors such as whether the contract uses plain language, what its print size is, and overall how easily the contract can be understood.

In other words the business certainty usually afforded by a signed contract will be eroded.

According to research by the Commonwealth Treasury Department, the business sectors most often complained about for unfair contract terms are franchising, commercial and retail leases, building & construction, financial services and credit contracts, and telecommunications.

The Australian Competition & Consumer Commission (ACCC) says that the most contentious contractual clauses (and hence those liable to be deemed unfair) are, in order, franchising conditions generally, automatic extension of the term, single party variation and termination rights, restrictive clauses, and cancellation fees.

Businesses of all sizes should commence reviewing their standard form contracts without delay.