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New laws to prohibit unfair contract terms

On Saturday 12 November 2016, a new law will come into effect that prohibits unfair contract terms in standard form contracts when dealing with small business. It will apply to any standard form contract entered into or renewed on or after 12 November 2016.

The law relates to the supply of goods or services or the sale or grant of an interest in land when at least one party to the contract is legally considered a ‘small business’. The ‘upfront price payable’ under the contract must be no more than $300,000 or $1 million if the contract is for longer than 12 months. If a contract is varied after 12 November 2016, the law will apply to the varied terms.

As you may know, the activities of bodies corporate are (in most cases) subject to the Australian Consumer Law. Bodies corporate often transact with businesses that employ less than 20 people – which is the definition of a small business.

Accordingly, we predict that almost every standard form contract entered into by bodies corporate will fall under these laws.

What is a standard form contract?

A standard form contract is a contract prepared by one party where the other party has little or no opportunity to negotiate the terms. These are often drawn up on a ‘take it or leave it’ basis. There are also standard form contracts that are provided by industry suppliers by a governing or peak body. In this instance, the terms are often vetted prior to use by the members to ensure that the terms comply with particular standards and laws. An example of this type of standard form contract is a strata managers administration agreements supplied by Stata Community Australia to its members.

Bodies corporate enter into standard form contracts when, for example, they:

  • enter into maintenance agreements
  • conduct large or small refurbishment works to common property.
  • engage service contractors (excluding caretakers)

Caretaking agreements will only rarely be a standard form contract.

What is the ‘upfront price payable’ of the contract?

Here’s where it gets a little complicated. In effect, this is the price payable under the initial order or supply, including all associated fees and charges such as delivery fees. It does not include termination or cancellation fees.

What documents are covered?

Any document mentioned in a contract covered by these laws will generally be subject to the laws. A clear example is where a director’s guarantee forms part of the terms of trade. If this is the case, the terms of the director’s guarantee must also not be unfair.

When is a term deemed unfair?

Legally speaking, a term is unfair if it:

  • causes a significant imbalance in the parties’ rights and obligations
  • is not reasonably necessary to protect the legitimate interests of the party advantaged by the term, and
  • causes financial or other detriment (for example, a delay) to a small business if it were relied on

In deciding whether a term is unfair, a court must also consider the term’s transparency.

A term is transparent if it is:

  • expressed in reasonably plain language
  • legible
  • presented clearly
  • readily available to any party affected by the term

Infamous examples of terms that tend not to be transparent are fine print and ‘legalese’.

What types of terms may be unfair?

Clauses of the following nature are often found in terms of trade, guarantees, leases and other commercial contracts. They are also likely to be unfair.

  • releases from future liability and hold harmless clauses
  • liquidated damages
  • indemnities for legal costs and other recovery expenses
  • unilateral variation of the contract
  • limitation of liability
  • automatic extension/rollover
  • no refund of deposit
  • termination without cause and without paying compensation

What happens if a term is deemed unfair?

Generally it cannot be enforced. Courts can also order compensation for a small business that suffers loss due to an unfair term.

What should bodies corporate and key stakeholders do now?

This law represents a radical change to the way bodies corporate deal with third parties. By and large, bodies corporate (being small businesses) are more often than not going to be the beneficiaries of the new law.

As such, we recommend that you have your key contracts reviewed for compliance with the new law before 12 November 2016.

This will allow you to identify potentially unfair terms so that you can seek renegotiation and removal at the time of any future variation or renewal.

It is best to avoid disputes (for example, by removing unfair terms), but should a dispute arise with a third party under a standard form contract, bodies corporate should seek advice early from a strata specialist lawyer.

A full explanation of the law can be found in our article here.

This article was contributed by y John Mahoney and Mitchell Downes at Mahoneys.

Contact John or Mitchell to talk compliance and preparation strategies today.

John is one of the founding partners of Mahoneys and is now the firm’s Chairman and the head of the property law team.John has over 35 years’ experience in most areas of property and business law. He is recognised as an industry leader amongst strata lawyers and is a life member of ARAMA.

Mitch is a partner in the Mahoneys commercial litigation team. Mitch joined Mahoneys in 2009 and since that time has practised exclusively in commercial litigation. In that context, he has acted for bodies corporate, caretakers, lot owners and committee members in relation to a variety of disputes.

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