Better protection on the horizon for small business owners

From Kane Williams, McKays Solicitors

Are you a small business owner or do you have business clients? You should be aware that the unfair contract terms regime that currently protects consumers is being extended shortly to apply to small businesses.

Businesses are entering into standard form contracts (which are pre-prepared and not normally negotiated) every day—for example, trade/credit applications with suppliers, leases and hire agreements. Standard form contracts, especially with the ‘big end of town’, will often contain very onerous clauses which shift risk and have substantial penalties and obligations. Basically, these contracts can be worded so that a lot of the risk is carried by the small business owner.

The changes commence on 12 November, 2016 and will affect contracts where:

  • at least one party to the deal is a small business, meaning that it has fewer than 20 employees;

  • the contract is a standard form contract (subject to some exceptions); and

  • the contract value is $300,000 or less, or if the contract is for more than one year, $1,000,000 or less.

Unfortunately, it is not straightforward to determine if a standard form contract has “unfair terms”. This can really only be determined by a Court. The three key questions used to identify an unfair term are:

1.    Does the term cause a significant imbalance in the parties' rights and obligations?

2.    Is the term not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term?

3.    Would the term cause detriment (financial or otherwise) to a party if it were to be relied on?

If the answer to all three questions is yes, then the term is unfair. It is also relevant as to how transparent the term is (i.e. in plain English, well-presented in a readable font). No more hiding things away in the fine print!

A few examples of contract terms that may be unfair include terms that:

  • Enable one party (but not another) to vary the terms of the contract;

  • Enable one party (but not another) to terminate the contract;

  • Enable one party (but not another) to avoid or limit their obligations under the contract; and

  • Penalise one party (but not another) for breaching or terminating the contract.

To take a further example, a term that allows a party to assign (i.e. transfer) the contract to someone else (like from Mr Reliable to Mr Dodgy) without the other party’s consent is normally unfair.

These new laws will provide greater protection and fairness to small businesses. However, they also mean that businesses need to revisit and probably amend their own contracts. So, pull those contracts out, get out that red pen and identify potentially unfair terms. If you don’t know what you’re looking for or would like a professional to handle, please speak with your solicitor.