Unfair Contract Terms Protections for small businesses Isla McRobbie and Matthew Lang #6374386
Disclaimer Disclaimer: This presentation is intended to provide general information only and should not be relied upon as legal advice. If you require legal advice on a matter please contact us. Liability limited by a scheme approved under Professional Standards Legislation. 2
Background Until recently, the unfair contract terms (UCT) regime applied only to individuals who entered into consumer contracts. The UCT protections now apply in a business to business context. The UCT regime permits Courts to declare unfair contractual terms in business to business contracts void and unenforceable. 3
Background policy drivers Why is this protection required? The primary policy consideration for the extension of the UCT protections to small businesses is to address the vulnerability of small businesses when contracting with larger businesses. Small businesses, in the same way as consumers, often lack the relevant knowledge, experience, resources or bargaining power to negotiate fair contracts. UCT protections found in the Australian Consumer Law (ACL) 4
\ Balance of Power? 5
Setting the Context Why might you need to know about UCT? Small Business Recipient of contract Business which issues the contract to a small business Business costs General awareness of issues relevant to your industry Negotiation tool As a consultant advisor 6
Issues raised by Representative bodies Submissions from many industry bodies (particularly in construction industry which may see itself as being more affected) Impact of unfair contracts on: Business costs Community Common use of standard form contract 7
Submissions General issue raised Tender Process Risk allocation Insurance and Indemnities Standards of Care Fixed Price Damages Commentary Cost, excessive competition, unpaid expertise/ideas Unfair, not allocated to party best suited (generally just away from client) Not fault based, uninsurable risk, required levels of insurance, proportionate liability, unlimited liability Fit for purpose Variable scope Inequitable, LD s, design errors and omissions * Institute of Architects, Association of Consulting Architects, Consult Australia, IBC 8
The new law Section 23 of the ACL provides that a term of a small business contract is void if: the term is unfair ; the contract is a standard form contract. The new law will apply to contracts that are entered into, or varied, after 12 November 2016. 9
Does the B2B UCT regime apply to me? There are 5 questions: Will the contract be entered into, renewed or varied after 12 November 2016? Is the contract a small business contract? Is the contract a standard form contract? Is the term unfair? Does an exemption apply? 10
Small business contract Is the contract a small business contract? A small business contract is a contract for: the supply of goods or services the sale or grant of an interest in land a financial product; or a contract for the supply, or possible supply, of services that are financial services. where, at the time the contract is entered into: at least one party is a small business ; and the upfront price payable under the contract does not exceed: o $300,000 for a contract with a term of 12 months or less; or o $1,000,000 for a contract with a term of more than 12 months. 11
What s a small business? A small business is a business that employs less than 20 people. When calculating the number of employees of a business, each full-time and part-time employee should be counted as one person. Casual employees are only to be counted if they are employed on a regular and systematic basis. 12
Standard form contract Is the contract a standard form contract? Generally speaking, a contract is a standard form contract where one party imposes the terms of the contract on the other party on a take it or leave it basis. If a party alleges a contract is standard form, the court must presume that the contract is standard form unless another party proves otherwise. 13
Standard form contract Alarm bells should ring if the answer is yes to one of the following: Yes No Was the contract drafted by one party before the parties entered into discussions? Does the contract fail to take into account the specifics of the particular deal? Was the contract presented to the counterparty on a take it or leave it basis? Was the contract not subject to negotiation (other than price, the subject matter of the contract)? Does one party have most of the bargaining power? 14
Unfair Is the term unfair? The test of unfairness has three limbs, all of which must be satisfied on the balance of probabilities: The term would cause a significant imbalance in the parties rights and obligations arising under the contract. The term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term. The term would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. 15
Unfair When applying the test, the ACL permits the Court to consider any matter it considers relevant, but must take into account: the extent to which the term is transparent ; and the contract as a whole. A term is transparent if it is legible, presented clearly, expressed in reasonably plain language, and readily available to any party affected by the term. 16
Unfair The ACL contains a list of terms that may be considered to be unfair in some circumstances. Default clauses: terms that contain excessive or punitive consequences for default (e.g. default interest rates, penalty fees); Unilateral variation: terms that entitle one party to unilaterally vary essential terms (e.g. price / payment terms) without giving the other party a termination right; Non-mutual assignment: terms that permit one party to assign rights under a contract without consent and to the detriment of another party; 17
Unfair Excluded remedies: terms that exclude certain remedies for default; Termination without cause: terms that give one party an entitlement to terminate at any time, without cause and on short notice; and Wide non-fault based indemnities: A wide indemnity that applies in respect of all loss or damage that might be suffered, regardless of fault. Indemnities that result in a party being liable for things that are outside of their control or do not arise from their breach of contract. 18
Exclusions and exceptions The following categories of terms are excluded from the UCT regime: Terms that define the main subject matter of the contract Terms that set the upfront price payable Terms that are required or expressly permitted by a law of the Commonwealth, or a state or a territory (e.g. permitted under the Franchising Code or another prescribed industry code). 19
Exclusions and exceptions The following categories of contract are excluded from the UCT regime: Contracts entered into before 12 November 2016 (unless renewed on or after this date) Shipping contracts Constitutions of companies, managed investment schemes or other kinds of bodies Certain insurance contracts covered by the Insurance Contracts Act 1984 (e.g. car insurance) Contracts in sectors exempted by the Minister no sectors are currently exempt. 20
Relevance in the Construction Industry (and consultant services) So how might this be relevant in construction and consultant services? Provision Possible Issues Liquidated Damages Unreasonable caps? Application of LD s for consequences higher up the contracting chain Onerous pre-conditions Limits on liability One sided Uncapped (and therefore extreme) Wide variation rights What is being varied? Price? Right to object Outside general scope? One sided termination Termination for convenience clauses what are the other party s rights 21
Relevance in the Construction Industry (and consultant services) Provision Possible Issues Time Bars Short notice periods? Waiver of rights if no response within time? Limit on one party s rights to commence proceedings Limit one party s vicarious liability for agents One party entitled to assign without consent To reflect a process up contracting chain? Express denial of right? Acts of employees or agents attributed to other party Could there be detriment? 22
Relevance in the Construction Industry (and consultant services) Provision Possible Issues Unilateral right to determine Warranty for work of others By a Superintendent? Principal s rep? What if Superintendent required to be honest and impartial? For example in accepting a preliminary design, required to be liable for work of others Novation Obligation to be novated without right to object 23
And what about Indemnities?... Watch out for one sided indemnities Indemnity transferring liability to small business regardless of fault Indemnity requiring small business to be liable for other party s negligence (Possible?) Unfair Terms Unlimited indemnity(?) Indemnities for certain aspects of loss (consequential loss or LD s) Proportionate liability contracting out? [insurable?] 24
So what? What happens if a term is unfair? Unfair contract terms are void. If a Court declares that a term is unfair under the UCT regime, the unfair term will be unenforceable and treated as if it did not exist. The contract will continue to bind the parties if it can operate without the unfair term. Severance clauses are crucial. It is not an offence to include an unfair term in a small business contract and there are no pecuniary penalties (fines) for doing so. 25
Enforcement and remedies If a court finds that a term in a contract is unfair, it can make a range of orders, including: declaring all or part of a contract to be void; varying a contract; refusing to enforce some or all of the terms of a contract or arrangement; directing a party to refund money or return property to the small business affected; or directing a party to provide services to the small business affected at the party's expense. 26
Practical tips Is there a need to respond to the UCT? Prepare a separate standard form contract for use in transactions with small businesses. Amend contracts to minimise the risk of contracts being found to have unfair terms such as: including balancing terms ; amending one-sided provisions; and curtailing non-mutual rights (e.g. pass through of costs etc.) Re-structure contracting arrangements. Limit use of standard form contracts or giving customers a chance to negotiate. Do nothing, but make a strategic decision on whether and to what extent potentially unfair terms are enforced. 27
Questions? 28
Unfair Contract Terms Protections for small businesses