[EP 003] Understanding the New Unfair Contracts Legislation and How the Legislation Impacts Your Business

LINKS

EPISODE HIGHLIGHTS

4:23 Old contracts & New contracts - What happens when the new legislation takes effect

5:21 A small business – defined

6:27 Designing your contracts and why it’s better to “assume” that you’re dealing with a small business

8:45 Outlining the unfair clauses you need to be aware of

10:21 Dealing with early termination fees

12:21 Limited Liability or No Liability Clause

12:43 Automatic rollover term

14:13 Termination for convenience

14:48 Liquidated damage clauses

15:41 Indemnities

16:56 Forfeiture Clauses

17:40 Termination Right for Minor Breaches

18:23 Exclusions to this new legislation

20:17 Tips, suggestions, and action steps


FULL TRANSCRIPT

Today, we're talking about brand new legislation that's really important for you to understand if you're a business owner, manager or if you deal with business contracts. It's also important for you to understand if you're a business advisor as this will impact your client, so it's a great thing for you to be making them aware of.

I'm really excited to talk about today's topic. If you want more information about this topic, check out our show notes or head over to talkinglaw.com.au where we'll provide information that's available for download to guide you through the legislation.

So, what are we covering today?

Why Is the New Legislation Important?

Firstly, we'll be talking about what's so important about this legislation. Then, I'll be talking about the nuts and bolts of the legislation as simply as possible. And then we'll discuss why it's relevant to you and the things you need to understand. Finally, we'll be talking about the action steps that you can take away moving forward.

New Unfair Contracts law: Find out what it means to you and your business

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We have these new laws that will come into effect in just a few months that will have the effect of extending consumer unfair contract protections to small businesses. So, they're already there in relation to business to consumer contracts, but now it will be operational in relation to business-to-business contracts in a certain set of circumstances that we'll talk about.

This change will force all businesses to consider the enforceability of the business-to-business or B2B standard contract terms.

The new laws could significantly impact businesses who use B2B standard form contracts and we'll talk about what standard form means a little bit later on because it means something different to what you have might expect it means.

If your business isn't ready, you may find that your contracts don't work or in particular, the particular clauses that you're looking to rely on in your contracts don't work and, in that case, that you've opened the gates to contracting parties arguing the clauses that you want to enforce are invalid. So, that's the importance for us here - ensuring that clauses that we have in our contracts still remain valid after the commencement of this legislation.

The changes also mean that if you're a small business, you may have access to a new range of arguments to deal with difficult contracts and harsh contract terms. You need to get ready for these changes now to ensure that you understand what these changes mean for your business.

So, what's the nuts and the bolts?

Essentially, as I said before, this is an amendment to current legislation that already exists. That new legislation will commence on the 12th of November 2016 - this year. Whilst it's not going to commence for another couple of months, it's important that you start to get your contracts in order now because, once the commencement period commences then it will be relevant to all contracts that you enter into or vary or renew after that date.

Mark your calendars – The new Unfair Contracts Law commences on 12 November 2016

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So, current legislation protects consumers from unfair contract terms, right now.

This new legislation will act to protect small businesses as well as consumers. And this all relates to unfair terms in standard form contracts and the new legislation essentially says in its simplest form, any term that is deemed to be unfair - where that term is in a standard form contract and one party is or may be a small business - then that term will be void. That means that term will be unenforceable. So that's essentially what the legislation says.

The Impact of the New Legislation on Old Contract

So, what contracts are impacted?

Firstly, there's a timing question:

  • Contracts that are entered into or renewed after the 12th November of this year will be caught
  • Contracts that have varied after 12th of November will also be caught, but it will only apply to the varied terms, or the terms that were varied; and
  • From the 12th of November onwards to month to month contracts.

So, in time, obviously, all of your contracts will be caught as long as the provisions apply, but this 12th of November point is important to bear in mind in relation to new contracts you're entering into, renewing, varying or any month to month contracts. That's the timing element.

What else does it take for contracts to be caught by this legislation? Because the legislation applies to most contracts, but not all contracts, so the legislation only applies when one party to a contract is a small business.

Seven things you need to know about the new Unfair Contracts Law.

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What's a Small Business?

A small business is a business with a head count of less than 20. The head count includes part times, full timers, and casuals who are employed on a regular and systematic basis. But one of the issues, obviously, is we don't necessarily always know or understand how many employees a counter party has.

One thing to bear in mind in relation to this legislation is that groups of companies aren't aggregated. So, you might be dealing with a counterparty that has a particular business entity, that has a number of subsidiaries or parent companies. It might be part of a group of companies, and that company will be considered to be a small business if one of their entities (which could be the entity that you're dealing with) has less than 20 people.

I think the relevance for us all is that it can be very difficult for us to understand whether or not a counterparty that we're dealing with is a small business or not, because we don't necessarily understand how many or what the head count is of that business.

It's best for us to design our contracts, if we think that there is a possibility that any contracting party might be a small business, then it's sensible and prudent for us to design our contracting process "assuming" that the parties that we're dealing with are small businesses, unless there's a particular reason why not to, or unless we know that the business that we're dealing with certainly couldn't be captured in this regime.

So remember only one party needs to be a small business in this situation.

It also applies where the contract price is less than AU$300,000 or, if the contract has a term greater than one year, then a contract value of less than a $1 million. When we’re looking at contract price we're looking at the quantifiable contract price; so where the contract price is unclear or unquantifiable the legislation applies.

What small business owners should know about the new Unfair Contracts Law

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And then the third component is where the contract is a standard form contract.

So, all of these three need to apply:

  1. 1. One of the parties has a head count of less than twenty;
  1. 2. The contract price is under those figures; and
  1. 3. It's a standard form contract now when we say standard form contract also we might think that what we are talking about is preprinted contracts.

I have contracts that can’t be negotiated by other side or contracts that appear for example, on a website as terms and conditions that we ask one party to click. Obviously they would comply as a standard form contract, but other contracts might also be caught if there’s little or no scope for one of the parties to negotiate the terms of the contract, or if one party isn’t genuinely given the chance to negotiate the terms of the contract.

So I think it’s really important for us to bear in mind that a lot of types of contracts might be caught by this legislation, not just those standard preprinted contracts or click-on online contracts - but certainly those would be likely to be captured as well.

So now we know what contracts are caught by the new legislation.

Let’s talk about what the issues are that the legislation highlights i.e. what clauses might be considered to be unfair.

You’ve been looking at clauses that cause significant imbalance in the rights and obligations between each of the parties, and that would cause detriment to the small business if the clause were relied on, and that clause isn’t reasonably necessary to protect the legitimate interests of the business.

So, what the hell does that all mean? That’s a bit technical so let’s talk about actual examples of clauses that are in the target area of areas that might be causing problems.

One Party Can Vary the Contract, but the Other Party Can’t

An example is a clause where one party can vary a contract and the other party can’t and, actually, one of the comments that I want to make in relation to all of these types of clauses is that you may not even realise you have these sorts of clauses in your agreements. For example, this first clause that we’re talking about where we have a clause where one party can vary the contract but the other party can’t vary it.

These clauses can also be caught in the boilerplate provisions right at the end of the contract and often you may not even realise that this clause is part of – is one of the clauses in your contract. So that’s something that I really want you to bear in mind. Often you may not realise that clauses you have in your contract might be considered to be unfair because you don’t even realise they’re there. So anyway, a clause where one party can vary the contract but another party can’t are an example that might be considered unfair.

Early Termination Fees

Early termination fees are another type of clause that might be considered unfair. Early termination fees are those fees that apply when one party wants to terminate before the end of the contract.

A common example of this might be for example, in a fixed term lease. In fixed term leases, we often have a clause that provides an automatic rollover. If there is a move made by one of the parties to terminate and if the business wants to terminate after roll over, often there’ll be another clause that says they have to pay an early termination fee.

So early termination fees won’t always be considered to be an unfair clause, however, these are the sorts of questions that a court will ask once this legislation comes in to work it out:

  • whether or not the term is fair or not?
  • whether or not the parties knew of its existence?
  • did both parties know about it?
  • did they understand what the fee was and how it would apply and how it would be calculated?

The courts will look at how understandable the contract is and whether or not there’s sufficient disclosure to both parties to sufficiently understand what the early termination fee is. Do they understand what they have to pay? Do they understand how it’s calculated?

Disclosure in this sense is really, really important so if you want to prove that a fee like an early termination fee in this new regime is not unfair, then one of the things you’ll have to ensure that you have done is ensure that you drafted this clause in a way that you can prove that the other party would have understood the clause: that the clause was clear and obvious and that the way the fee is calculated is disclosed and easy to understand.

So this is where it becomes extremely important that these sorts of clauses are picked out of your agreements, are reviewed and are redrafted now so that they’re written really clearly with all of the detail that’s required to communicate the amount and how it will be calculated.

Limited Liability or No Liability Clause

Alright, the next area that is a possible example of the types of clauses that might be considered unfair are the limited liability or no liability causes.

Often we see these sorts of clauses that seek to limit liability in cases where it’s just not reasonable to do so and I think we’re going to see a lot of action moving forward in relation to these sorts of causes.

Automatic Rollover Term

The fourth area is automatic rollover terms.

So, automatic rollover terms are those terms that say: at the end of the initial term of the contract, or the term of the contract, this contract will roll over for a new term, unless one party notifies the other party in writing say six months before the end of the termination date.

These sorts of clauses are well known to capture businesses who forget or don’t even know that this clause is buried somewhere in the terms, and often what happens is the companies seek to recontract to a particular type of service, say, for example, waste management services or printing services or photocopying services, then they find out that in fact the contract has rolled over into a new term and they’re caught there for another five years, or whatever the initial term was.

So this unfair contract terms legislation will now give us a new avenue for being able to argue why automatic roll over terms are unfair and therefore shouldn’t apply. But, if you’re seeking to rely on an automatic roll over term you’re now going to have to redraft these terms to make sure you’ve proven that they’re not unfair and once again, as I said before in talking about other clauses, it will be ensuring that it’s written in a way that’s clear and easy for the parties to understand so that you can say that full disclosure has been given and that it’s not unfair.

Termination for Convenience

Alright, so, termination for convenience. This is an interesting one because this is in a lot of contracts. Termination for convenience means the ability of one party to terminate without cause, not due to the break of the other party but just for any reason at all and, once again, these clauses won’t always be considered to be unfair, but in certain circumstances now they might be considered to be unfair so it’s really important that we’re going back and checking all the termination for convenience clauses and ensuring that they’re used in the right way and in the appropriate way so that they are not open to attack.

Liquidated Damages Clauses

Sixth, liquidated damages clauses. Liquidated damages are a payment from one party to another where the first party has breached the contract. There are ways for us of calculating loss at the beginning of the contract. Once again, clauses will be considered unfair if they’re unliquidated damages clause, where one party may not understand the way in which this damage is calculated, or if it is excessive in the circumstances.

Now, we used to have a whole body of law that talked about what was excessive, but this new unfair contracts regime is going to really bolster that area to a significant degree. So these definitely are clauses that we need to go back and have a look at and redraft to make sure they’re clear and not considered to be unfair.

Indemnities

Seventh, wide indemnities.

Indemnities are always a problematic area and they’ll become particularly problematic now moving forward. So, an indemnity is a promise by one party to pay the other party for possible damage, loss or injury.

A particular issue going forward now will be clauses that essentially say that the small business will be responsible for the loss of the large party, even if the larger party contributed to that loss, which seems like a crazy clause to be in an agreement that anyone would sign but, I’ve stopped counting the number of contracts I see it in. Honestly, I see it all the time, and people just mostly don’t understand the clauses and they don’t understand what they really mean and often the businesses that have the clauses in their own agreements also don’t understand what it means.

So the risk is if you have wide indemnities in your agreement and you’ve overshot to what would be considered fair, then your whole indemnity could be struck out as void, which means because you have accidentally overreached you now are completely stripped of that indemnity protection.

As you can see, it’s extremely important that we’re reviewing these indemnity clauses and ensuring that they’re appropriate to the situations that we’re using them for.

Forfeiture Clauses

The eight area as an example is forfeiture clauses. A forfeiture clause is where a business can retain part of the other party’s funds on termination.

An example of this would be say, a travel card where I go overseas and I put a thousand dollars on a travel card, but I only use nine hundred and fifty dollars on the card so I’ve got fifty dollars balance left. Then, when I return, the provisions of that agreement in that travel card say that I’m not allowed to get a refund of the remaining fifty dollars balance on the card that I didn't spend, which is quite common.

This is the sort of clause that now may be deemed as unfair in this new regime.

Termination Right for Minor Breaches

And lastly: Termination right for minor breaches. This is where we have clauses that essentially say we have the right to terminate the contract if the other party has breached the contract and has failed to remedy the breach within a period of time.

The unfair contracts regime is now saying, maybe that broad brush approach to termination and breach clauses is too broad now. Maybe that is going to be creating the situation where that termination clause would be seen now as an unfair clause.

I think that’s another area that’s going to be really important for us to be focusing on clearly and reviewing.

Exclusions

Alright so they are the possible examples. Just briefly I want to talk about the exclusions. So, shipping contracts aren’t included, the company constitution, managing business schemes and general insurance (life insurance, home insurance, car insurance) and one other area that has specifically been carved out is that you can’t now challenge the price of the contract. You can’t say that the contract price is unfair.

Alright so what does this mean for you? Essentially, clauses that you may want to rely on now may be void. So, contracting parties might now have an argument about clauses that they don’t want to comply with. So if you have clauses in your contract that might be deemed unfair, you’re now giving your counter parties reasons to in fact argue that those clauses don’t apply to them, and in doing so, potentially stripping out all the protections you have in that contract, in that particular clause. Conversely if you are a small business you now actually have a new arsenal that’s opened up to you in relation to dealing with these contracts that might bring provisions or clauses that might be considered unfair.

So one of the things I would really like to mention is if you are a small business you now have to be careful in negotiations because potentially if you’re spending a lot of time negotiating a particular term in the contract and you’ve forgotten to negotiate other terms, that essentially are unfair, then you maybe depriving yourself of the right to argue that they are unfair later on just because you have made it clear that you have negotiated the contract, if you get what I mean.

It’s really important that you understand the clauses that you’re negotiating and understanding the risk that is contained in the clauses that you’re not negotiating.

Alright, so moving on what should you do now?

I think the first step is ensuring that you get ready now or, if you’re an adviser, ensuring that you’re letting your clients know that they need to start getting ready now, so you need to review your contracts. Could someone argue that your contracts are unfair? You need to understand what your important clauses are and reduce your risk in those clauses and don’t over stretch.

Three key action steps you need to make as a small business owner to comply with the new Unfair Contracts Law

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Make sure you’re limiting your clauses to something that can’t be rebutted later on.

Review your contract process - do you have checks and balances in place to ensure that small businesses understand their obligations? Is your contract easy to read? Will it be easy for you to show that businesses who signed your contracts have understood what it is that they’re signing?

And, keep in mind the new protections if you are a small business. Be careful about what I said about negotiating unimportant clauses and missing the important ones and therefore taking away your right to claim that they’re unfair in the future. And maybe you just consider holding off on signing or renewing your contract until the 12th of November so you have access to this new regime .

So that’s it for today just a quick recap about what we covered today in this episode we talked about

  1. 1. the nuts and bolts of the new legislation,
  1. 2. what sort of clauses might be considered to be unfair,
  1. 3. the consequences of having clauses that might be considered to be unfair; and
  1. 4. the action steps you should be taking now.

If you would like more information about this topic head over to our website at talkinglaw.com.au for a free download on the key items to be careful of in your contracts to avoid the issues raised by this new legislation.

Through that website you’ll also be able to download a transcript of this podcast episode if you want to read about it in more detail and you’ll also find details of how to contact our lawyers at Aspect Legal.

If you would like help with any of the items that we covered today and finally if you enjoyed what you heard today please head over to iTunes and leave us a review, we’d be awfully grateful. Thanks again for listening in and see yo