New unfair contract terms law for small business comes in to effect 12th November 2016. This new law provides protection for small business for unfair terms in standard form contracts.
At least one party to the contract must be a ‘small business’ (defined as a business that employees fewer than 20 people at the time the contract is entered into).
Unfair Contract Terms Law Applies To
It applies to small business ‘standard form’ contracts for a ‘financial product, or the supply or possible supply of financial services’ which do not exceed $300,000 – or $1million if the contract is for more than 12 months. Examples of such are contracts for business loans, credit cards and client or broker agreements.
Unfair Contract Terms Law Doesn’t Apply To
The unfair contract terms law does not apply to insurance contracts regulated under the Insurance Contracts Act 1984 and the constitutions of companies, managed investment schemes or other kinds of bodies. The Minister has not currently exempted any sectors from the new laws.
What is Deemed an ‘Unfair’ Term
A term in a standard form small business contract is ‘unfair’ if it would cause a significant imbalance in the parties’ rights and obligations arising under the contract and the term:
- is not reasonably necessary to protect the legitimate interests of the party that would benefit from its inclusion;
- would cause financial or other detriment (e.g. delay) to a small business if it were to be applied or relied on.
What is a ‘Transparent’ Term
A term is considered to be ‘transparent’ if it is legible, expressed in reasonably plain language, presented clearly and readily available to any party affected by the term. Terms that may not be transparent include terms that are hidden in the fine print or schedules, or terms that are phrased in legal, complex or technical language. However, a term that is transparent could still be found to be unfair.
Important to Review Existing Contracts
ASIC expects businesses to review their standard form small business contracts to remove any terms that could be considered to be unfair to ensure compliance before the 12th November 2016.
If businesses using contract terms of potential concern are uncooperative, or refuse to make recommended changes, ASIC may consider enforcement action.
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