Is your contract unfair?
Dubbed the ‘Unfair Contracts Act’, recent changes to legislation finally provides parties to standard form contracts with greater protection. A standard form contract is one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms of the contract, effectively it is a ‘take it or leave it’ contract.
These changes apply to contracts entered into on or after 12 November 2016 or to contracts renewed (including automatically renewed or “rolled over”) on or after 12 November 2016. The changes also apply to a term of a contract that has been varied after 12 November 2016.
A term of a contract is unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Examples of terms that may be unfair include:
- terms that enable one party (but not the other) to avoid or limit their obligations under the contract
- terms that enable one party (but not the other) to terminate the contract
- terms that penalise one party (but not the other) for breaching or terminating the contract
- terms that enable one party (but not the other to vary the terms of the contract.
In order for the Unfair Contracts Act to apply, the contract must:
- be for the supply of goods or services
- have at least one of the parties who is a small business (being a business that employs less than 20 people, including casual employees employed on a regular and systematic basis)
- have the upfront price payable under the contract of no more than $300 000 or $1 million if the contract is for more than 12 months.
If a court or tribunal finds that a term is ‘unfair’, the term will not be binding on the parties, however, the rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.