B2B Unfair Standard Form Contracts

B2B Unfair Standard Form Contracts

If you do business with small businesses after 12 November 2016 then a new contracts regime will apply to your standard form contracts. This applies whether you are a small or large business. If you have a standard-form contract (e.g. Terms and Conditions) then the new regime applies to these contracts.

On the flip side, if you are a small business from 12 November 2016, any standard form new contracts you sign up to, standard-form contracts that are varied after 12 November 2016, and standard-form contract rollovers from that date can be challenged under the new regime.

There is already a similar regime in place for consumer contracts under the ACL.

Why should I care?

While there is no pecuniary penalty for having an unfair contract term in your standard-form contract as a result of the new regime, any such terms will be invalid for new contracts, varied contracts or contract rollovers from 12 November 2016.

Leaving an unfair term in a contract could also be false or misleading conduct (section  29(1)(m) of the ACL), which does attract penalties and other legal remedies in favour of the other party to the agreement. This could leave your business with a large legal bill and also potentially tens or hundreds of thousands of dollars of penalties and damages.

What kinds of clauses are potentially unfair?

The general principle here is that a term in a contract is unfair if:

1. the term would cause a significant imbalance between the various parties’ rights and obligations arising under the contract;
2. the term is not reasonably required to protect the legitimate interests of the party benefitting from the term; and
3. the term would cause a financial or other detriment to a party if it were to be applied or relied on.

The general principles above will be applied by the courts in relation to various clauses of a contract. This is not an exhaustive list, but here are some of the problematic clauses commonly found in standard form contracts:

1. Clauses that are not immediately clear what they mean;
2. One sided clauses that permit only one party to a contract to avoid performing its obligations under the contract;
3. Unreasonable limitation of liability of a party under a contract (e.g. limiting a damage claim to a small arbitrary figure for intentional or negligent damage);
4. One-sided termination clauses where one party but not the other decides when to terminate a contract for no good reason;
5. One-sided penalties for trivially breaching a contract or that has no link to actual loss suffered as a result of the breach;
6. Clauses enabling unilateral variation of the contract by one party;
7. Clauses that allow only one party to the contract to renew or not renew the contract;
8. The right of one party to change the upfront price of the contract without the right of the other party to terminate the contract;
9. clauses that permit one party to unilaterally decide whether a breach has occurred or what the contract means;
10. limitations on one party to sue or how that party can sue the other party for breach of a contract; and
11. unilateral assignment of a contract to a third party without consent.

What should I do?

It is important to review your standard form contracts for compliance with the new contracts regime. The ACCC expects businesses to comply with the new regime from 12 November 2016. There will be no phase-in period during which the ACCC will not take action.