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Quick fixes to avoid unfair contract claims

Quick fixes to avoid unfair contract claims

Firms dealing with small businesses of less than 20 employees are being urged to review their contracts for unfair terms, with a business lawyer suggesting such changes need not be a complicated endeavour.

A number of large businesses have been accused of retaining contracts and clauses that impose unfair conditions or restrictions on small businesses, including food delivery platform Uber Eats.

The ACCC took formal action against waste management company JJ Richards in 2017, one of the first times the unfair contract provisions were subject to formal regulatory action since they were extended to cover small businesses from 12 November 2016.

My Business also revealed earlier this month that some commercial lease agreements may be in breach of the unfair contract rules, after allegations were raised during the banking royal commission.

Yet despite large firms being in the spotlight, the laws cover all businesses dealing with a firm with less than 20 employees, which covers a huge number of businesses. In addition to the business size, the rules also are restricted to contracts worth up to $300,000 for less than 12 months, or $1 million in value for more than 12 months.

According to Raphael Brown of Clearscope Legal, many businesses could be caught unawares, as they often forget to update the terms and conditions posted on their website.

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“I would say it is quite prevalent that people have not updated their contract terms,” he told My Business.

“Even the most highly resourced businesses have not addressed it, so you can imagine how difficult it can be for a business that is much less resourced,” Mr Brown said, noting the example of Suncorp having failed to remove unfair terms some 2.5 years after first being made aware of the issue.

What impact do unfair terms really have?

Unfair terms can impact both the businesses imposing them and those on the receiving end, Mr Brown said.

“For small businesses, they could be complying with terms that are void under the law. It could be a monetary impact, or it could even be that a contract was terminated on them when it shouldn't have been,” he said.

For the bigger business, a voided contract or clause creates a mess in the relationship between the parties until a new contract is agreed on and signed. 

And while he conceded that some larger firms may simply view any complaints about unfair terms as another cost of doing business, he said one of the biggest risks of getting caught out is reputational damage.

“The big risk is the risk of embarrassment. [For example] JJ Richards had to publish a notice on their website and contact all of the clients under those contracts and inform them,” said Mr Brown.

What can be done to ensure compliance?

Mr Brown said there are a number of steps businesses can take to ensure their contracts are not unfair to smaller partners and, therefore, not face the prospect of being declared null and void.

In an eBook he compiled on the subject, Mr Brown said there are five key “fixes” businesses can take:

• Update limitation of liability clauses
• Adjust auto-renewal clauses
• Make contracts more transparent
• Make indemnity clauses more balanced
• Curb the right to unilaterally change the contract

Know the legal limitations

Mr Brown noted that there are certain parameters and exemptions to the unfair contract rules to which both sides of the coin should be aware.

While the ACCC is responsible for receiving complaints and can raise concerns about a clause or entire contract, ultimately only a court can force change and declare a contract void. But a small businesses is well within its rights to bypass the ACCC and launch legal action directly over their individual dispute.

There are also certain aspects of a contract which are exempt from the rules, Mr Brown said. Chief among these is the up-front price of the product or service, as well as the actual goods or services being supplied.

A trickier point, Mr Brown noted, is that the legislation generally applies to contracts that are issued on a ‘take it or leave it basis’, rather than contracts that are negotiated between the parties. But it can be open to legal interpretation as to what is negotiable, given some contracts are negotiable in theory but in practice are effectively imposed on the smaller business.

Quick fixes to avoid unfair contract claims
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