What does the new unfair contract terms legislation for small business mean for you?

by The Editor 0

From 12 November 2016, a new law will protect small business in Australia from unfair contractual terms.

The law covers ‘standard form contracts’ that are prepared by one party and presented on a ‘take it or leave it’ basis, where:

  • At least one of the parties is a small business (employing less than 20 people);
  • The upfront price payable under the contract is no more than $300,000, or $1m if the contract is for more than 12 months; and
  • The contract is for the supply of goods or services or the sale or grant of an interest in land.

A term is unfair if:

  • It would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  • It is not reasonably necessary to protect the legitimate interest of the party advantaged by the term; and
  • It would cause detriment to a party if applied or relied upon.

It is likely that many LIMA members will be affected by these changes whether they are a small business, or whether they are dealing with a small business, so it is crucial to know what these changes mean.

Picture this example of an Unfair Contract

You think you’ve landed the dream licencing agreement with an entertainment giant “Movieworks” to sell licensed merchandise. In your haste to get the deal inked, and to save costs, you didn’t have lawyers review the agreement before signing. It’s now 6 months down the track, and Movieworks has varied the terms of the agreement to impose a higher royalty fee on every toy sold, without your consent.

When you complain, you are told that if you don’t want to pay the higher fee, you can terminate the agreement, but that you will have to pay an exorbitant early termination fee.

Sales of the merchandise have been great and you want to keep the agreement on foot, but your profits are being undermined by the higher royalty fee. Alternatively, if you were to terminate, you wouldn’t be able to afford to pay the early termination fee.

You feel the changed royalties structure and early termination fee are unfair.

So what should you do? You may be protected by the new legislation.

If the agreement was offered to you on a take it or leave it basis, you are a small business (20 employees or less) and the upfront price payable under the contract is no more than $300,000 or $1m if the contract is for more than 12 months, then you will be protected by the new legislation and the unfair terms will be void and unenforceable.

These terms are unfair because:

  • They cause a significant imbalance in your rights and obligations as compared to Movieworks;
  • They are not reasonably necessary to protect Movieworks’ interests; and
  • They would cause financial or other detriment to you if they were to be relied upon.

While we would always recommend having a reputable lawyer review any agreement prior to signing, these amendments might be your saving grace if you get caught as victim to a truly unfair contact.

Authors; Stuart Gibson & Ellen Rattray from Mills Oakley Lawyers