Unfair Contract Regime extended to small business contracts – is your business ready?

1 May 2022

As set out in our last update here, businesses have until 16 August 2022 to ensure they comply with the amendments to the Fair Trading Act (FTA). These changes extend the existing unfair contract terms (UCT) regime that currently applies to consumers, to standard form ‘small trade contracts’ in business-to-business relationships. It’s important that businesses understand the implications of these changes and review their practices.

Any term in a small trade contract that is found by the Court (on application of the Commerce Commission) to be unfair, will be unenforceable and will mean a breach of the FTA.

In practice what does this mean for your business?

The 16th of August 2022 is fast approaching. As with the consumer amendments in 2015, businesses should be proactive in reviewing their contracts and practices to ensure they align with the legislative changes.

As a business what proactive steps can you take to comply with the FTA changes?

We suggest you start by assessing which of your contracts are “standard form contracts”. Essentially, a standard form contract is a contract which has not been subject to extensive negotiation between the parties. In a business-to business sense, this will include terms of trade and standard form terms and conditions entered into between customers and suppliers.

Once you have identified which of your business relationships include standard form contracts you will need to consider whether those relationships fall within the definition of ‘small trade contracts’ under the FTA. A ‘small trade contract’ is a standard form contract where the associated trading relationship has an annual value of less than $250,000. Importantly, the $250,000 threshold is determined from the beginning of the relationship, rather than reassessed each year. For example, if your business signs up a trade relationship which is worth $50,000 at the outset, the UCT regime will likely apply if the future annual trading relationship exceeds $250,000 and the terms of the initial contract are not updated.

Do your small trade contracts contain unfair contract terms?

If you have established that you have small trade contracts which are subject to the UCT regime, your business will need to assess where any terms within those contracts could be considered unfair.

The general principles as to what constitutes an unfair term are broad. However, the key elements include any term that:

  • would cause a significant imbalance in the contracting parties’ rights and obligations;
  • is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • would cause detriment to a party if applied, enforced or relied upon.

Whether a term is considered an UCT will depend on each factual situation, the contract as a whole, and the relative bargaining position of the parties. It’s unclear what position the Commerce Commission will take with regard to the assessment of UCT’s in business-to-business contracts. The Commerce Commission has indicated that they will release guidance in June this year.

What can you do before the law comes into effect?

It may take time to review your standard form contracts and we suggest you start your review as soon as possible. While there is no explicit commentary from the Commerce Commission as to what will constitute a UCT with regard to business-to-business contracts, we look to the current consumer UCT regime and Australian case law to assess what will likely be considered unfair. Examples of UCT are likely to include:

  • termination for non-material breaches (e.g. termination for convenience clauses);
  • unilateral right to variations;
  • wide indemnity clauses;
  • wide exclusions of liability, including limiting or excluding liability to the maximum extent possible or beyond what is reasonably necessary to protect the interests of a party;
  • unilateral determinations that can be made objectively;
  • wide exclusivity clauses;
  • one-sided obligations imposed on one party where they have less control of the matter (e.g. if a party is required to indemnify the other party for losses that they have not caused or pay a fee in circumstances beyond their control);
  • unreasonable allocation of responsibilities;
  • fees not reasonably necessary to protect legitimate interests and penalties; and
  • complicated termination provisions and complicated automatic renewals.

Other changes to the FTA

In addition to the UCT regime the FTA further includes:

  • a statutory prohibition on unconscionable conduct in trade. Although the FTA does not define “unconscionable” it is likely that this will capture conduct such as undue pressure or influence, unfair tactics, not acting in good faith and the relative bargaining strength of the parties to name a few; and
  • also strengthens the ability of consumers to require a door-to-door salesperson to leave or not enter their property, including through the use of written signs such as ‘Do Not Knock’.

If you have any questions regarding the changes and how they affect your business or would like assistance with reviewing your standard form contracts for compliance, please feel free to contact us.

Angela Scarlett is part of our Corporate & Commercial team at Norris Ward McKinnon.

Corporate & Commercial Team