Standard form B2B contracts are convenient, but they do not have to be unfair or one-sided – and that’s guaranteed by law.

Consumers have had protection against unfair contract terms imposed via standard form contracts since 2010. And, since 12 November 2016, this law has been extended to apply to small business contracts, too.

The Federal Court affirmed this late last year when it declared, by consent, that eight terms in the standard form contract used by JJ Richards & Sons Pty Ltd to engage small businesses were unfair and therefore void.

The legislation aims to provide reciprocal rights to both parties. In other words, if one party has a right to insist that the other party keeps its proprietary information confidential, then both parties have the exact same right.

A court can declare that a term of a standard form contract is an unfair term on the application of a party, the Australian Competition and Consumer Commission, a state or territory regulator or the Australian Securities and Investment Commission.

For the contract to be deemed to be with a small business:

  • That business must employ (including all categories of employees using a headcount approach) less than 20 people at the time the contract is made; and
  • If the contract is for one year or less the total price of the contract does not exceed $300,000; or
  • If the contract is for more than one year the total price of the contract does not exceed $1,000,000.

The contract is a standard form contract, meaning (generally) the contract is pre-prepared by one party and provided to the other party on a “one size fits all”, “take it or leave it” or “unilateral” basis with no opportunity to the other party to negotiate its terms.

The contract is a contract for the supply of goods, services, land, financial products or financial services.   The unfair contract terms will cover contracts where the Small Business is the supplier of goods or services, as well as where the small business is the acquirer.

The contract is not an excluded contract, including various forms of shipping contracts, constitution of a company, managed investment scheme or other kind of body or a Small Business contract that is covered by Commonwealth, state or territory law.

A term is unfair if it:

  •  causes a significant imbalance in the parties’ rights and obligations;
  • is not reasonably necessary to protect the legitimate interests of the benefited party; and
  • causes detriment (financial or otherwise) to the other party.

The term must satisfy all three criteria. In determining whether a contract term is unfair a court may take into account the contract as a whole and the extent to which the term is transparent. Terms that are required by law or which define the main subject matter of the contract or set the price are exempt from being declared unfair. There is some argument that bringing the term to the small business’s attention assists.

 

What if a term is held to be unfair?

  • unfair terms in standard form contracts will be void. This means that the term will be unenforceable and treated as if it did not exist. If the contract can operate without the unfair term, it will continue to apply.
  • It is not an offence to include an unfair term in a contract and there are no pecuniary penalties provided, however if a person attempts to enforce a provision of a contract that is declared unfair then remedies can apply, including court-awarded compensation.

What should you be doing?

In my view all contracts should fairly consider the interests of both parties and who is best placed to carry which risk and expense. This case serves as a warning to all businesses to review low-value standard form B2B contracts which potentially might be used in transactions involving Small Businesses and any existing contracts which they intend to renew or vary.

You should consider revising any clauses that may risk being rendered void and unenforceable if found to be “unfair” under the laws – including for example clauses that:

  •  create an automatic rollover extension of the contract;
  •  allow one party to vary the contract unilaterally;
  •  levy excessive fees;
  •  impose excessive interest rates on outstanding moneys; and / or
  • affect or limit a party’s ability of redress or remedies for breach by the other party.

Alternatively consider creating a separate set of contracts for big businesses and small businesses.

If you are a small business, you should not be daunted and use the unfair contract laws as a bargaining tool when negotiating with larger clients who insist on using unilateral standard form contracts.