With the new unfair contract term provisions in full swing, here’s a snapshot of 5 things you need to know to avoid getting caught out.
1. It Applies to Standard Form Contracts
The unfair contract term provisions apply to standard form contracts entered into or renewed on or after 12 November 2016. A standard form contract is one that’s in a template prepared by one party, and usually offered on a ‘take it or leave it’ basis. Examples of standard form contracts include:
- Franchise Agreements
- Terms and Conditions
- Supply Agreements
- Service Agreements
A contract that’s open to negotiation is more likely to fall outside of the unfair contract term provisions.
2. It Applies to Small Businesses
At least one of the parties to the contract must be a small business – that is, employs fewer than 20 employees (including casuals).
The unfair contract term provisions only apply to contracts where:
- If the term of the contract is for one year or less – the upfront price payable under the contract is no more than $300 000
- If the term of the contract is for more than one year – the upfront price payable under the contract is no more than $1 million
Coffees R Us is the franchisor of a successful franchise system. It enters into a franchise agreement with Joe’s Coffees for a term of five years. Joe’s Coffees pays an initial franchise fee of $50,000. Coffees R Us is caught by the unfair contract terms regime, and must ensure its franchise agreement is compliant otherwise risk having any unfair terms declared void.[/idea]
3. When is a Term Unfair?
Whilst common sense can usually be applied to whether a term is unfair, generally it would include a term that:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract
- 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.
The Coffees R Us franchise agreement contains a term which states “Coffees R Us may vary the royalties payable by the franchisee at any time by giving the franchisee 14 days’ notice in writing.”
As this term involves a unilateral change by Coffees R Us and would cause a financial detriment to the franchisee, it is likely to be considered an unfair term.
4. What Happens if a Term is Unfair?
A court or tribunal may declare a term to be unfair. If it does, the term will be void, meaning it is not binding on the parties. The remainder of the contract will, however, continue to bind the parties to the extent that it can operate without the unfair term.
A court can also make other orders, including that money be refunded or that certain services be provided to the affected party.
5. What Should You Do?
If you’re the party preparing the contract, there are a few things you can do to make sure you don’t get caught out by the unfair contract term provisions:
- Review your template agreement and amend or delete terms you think may be unfair. If in doubt, speak to a lawyer
- Be open to negotiations with the other party. This doesn’t mean that you must agree to any and all requests, but if not, provide clear explanations as to why
- If the contract has already been entered into and you get a complaint about an unfair term, try and resolve it directly with the other party
If you’re the other party and think a term is unfair:
- Explain to the other party why you think the term is unfair, and request that it be deleted or amended
- If the contract has already been entered into and you believe a term is unfair, try and resolve it directly with the other party
- If this fails, speak to a lawyer or contact the ACCC
Do you have a question or concern about an unfair contract term? Contact Legalite now.