From 12 November 2016 the current Unfair Contract Terms Regime (UCT Regime) will be extended to cover standard form contracts entered into with ‘small businesses’. Not only new contracts entered into from this date will be affected, but also any contracts that are varied from this date.
The changes will have a significant impact on the way Australian businesses contract with each other and it important that you understand how you will be affected and are prepared ahead of this date.
As at the date of introduction Australia will be the only country in the world to apply this type of stricture to business to business contracts.
Standard form small business contracts affected
The extended UCT Regime will apply to any standard form small business contract for the supply of goods and services, including financial services or products or an interest in land.
The changes will also apply to franchise agreements and will be in addition to existing extensive compliance and regulatory obligations under the current Franchising Code of Conduct.
What is a ‘small business contract’?
A contract will be a small business contract where:
· at least one of the businesses employees less than 20 people; and
· the upfront price of the contract is no more than $300,000 or $1million if the contract length exceeds 12 months.
When will a term be “unfair”?
Contractual terms will considered to be unfair if they cause a significant imbalance in the rights and obligations between the parties and where a term goes beyond what is reasonably necessary to protect a party’s legitimate interests.
In addition, a contractual term will be unfair if it would cause the other party financial detriment if relied upon.
Unfair terms will be void
Any term of a small business contract that is found to be unfair will be void.
The remainder of the contract will continue to operate to the extent that it is capable of operating without the unfair term. However, the whole of a contract may be lost if the contract is incapable of being fulfilled without the unfair term.
Limited Exemptions
The new UCT Regime provides for a limited number of exemptions for terms permitted by other laws such as the Franchising Code. However, no blanket exemption has been allowed for franchise agreements.
Multiple recent publications released by the Australian Competition and Consumer Commission (ACCC) have highlighted franchise agreements as being one of the key areas to be covered by the new regime.
The forthcoming changes are likely to have a significant impact and increase the considerable compliance obligations that are already placed on franchisors.