Is your standard form contract fair?

Unfair contract terms provisions to be extended to small businesses on 12 November 2016.

• Under existing law, a term of a consumer contract is void if the term is unfair and the contract is a standard form contract.
• Amendments to existing law will extend the unfair contract terms provisions to apply to a broader category of small business contracts.
• The amendments will have significant implications for the contracting requirements of small businesses, as well as big businesses that contract with small businesses.

What type of contracts are affected?

Currently, the unfair terms provisions of the Competition and Consumer Act 2010 (Cth) Schedule 2 Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (Cth) only apply to consumer contracts that are standard form contracts.

Consumer contracts are contracts for the supply of goods or services, or a sale or grant of an interest in land, to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or construction.

A standard form contract is one which is prepared by one party to the contract and is not subject to negotiation between the parties. This is the case with many standard terms of trade which are offered on a ‘take it or leave it’ basis.

When is a term of a contract ‘unfair’?

A term of a standard form contract is unfair when the term:

1. causes significant imbalance in the parties’ rights and obligations arising under the contract
2. is not reasonably necessary to protect the legitimate interests of the party who would rely on the term
3. would cause detriment (financial or otherwise) to another party if it were to be relied upon

Terms which may be unfair could include the following types of clauses which are common in contracts for the provision of transport and logistics services:

• exclude liability in all circumstances, including when loss or damage is caused by negligence
• require a small business to indemnify the other party for its own negligence or breach
• enable one party to unilaterally vary the contract, including increases in fees or charges without allowing the other party the right to terminate the contract
• extend contractual benefits in terms and conditions to third-party sub-contractors
• liquidated damages clauses
• impose a time bar on the bringing of claims
• exclude liability in the absence of any notice of claim being issued within the prescribed time.

Amendments

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (Act) extends the reach of the unfair terms provisions so that they also apply to small business contracts and not just consumer contracts.

The extension of the provisions will:

1. apply to new contracts, or contracts that are renewed or varied after 12 November 2016
2. will not affect existing contracts or contracts which are not renewed or varied after 12 November 2016.

Under the Act, the definition of a small business contract is a contract in which:

1. one of the parties employs fewer than 20 employees (including casuals employed on a regular or systemic basis), and
2. one of the following apply:
   1. the upfront price payable under the contract does not exceed $300,000
   2. the contract is for a term of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

The effect of the amendments will be that a much broader category of standard form contracts will be subject to the unfair contract terms protections. If a term of a standard form contract is found by a court to be unfair, the offending provision may be declared void by a court. As a result, the unfair term is treated as if it never existed and the remainder of the contract continues to bind the parties to the extent that the contract is able to operate without the unfair term.

Exclusions

The Unfair Contract Terms Amendments do not apply to the following shipping contracts:

1. contracts of marine salvage or towage
2. a charter party of a ship
3. contracts for the carriage of goods by ship (which includes any contract covered by a sea carriage document within the meaning of the amended Hague Rules referred to in section 7(1) of the Carriage of Goods by Sea Act 1991.

To the extent that a standard form contract applies to any of the above, the Act will not apply. There has not, however, been any exclusion for contracts for the carriage of goods by road, air or rail. Transport and logistics providers will therefore not be able to rely on the exclusion across all of its contracts with customers.

Recommendation

In light of the amendments that will be made by the Act, all transport and logistics providers must review their standard form contracts to minimise the risk that the terms on which they seek to rely may be declared to be void. Changes will need to strike a balance between reasonable protections for the service provider and reducing the risks of a court determining that the applicable protection goes too far so as to be unfair and unenforceable.

This article originally appeared in the Spring 2016 edition of InTransit. Other articles in this newsletter included:

• Are you roadworthy?
• Heavy Vehicle National Law reform