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Friday, November 20, 2015

Are you affected by the new unfair contract terms legislation?

By Nadia Guadagno, Senior Associate

New legislation has just been enacted which extends unfair contract term protections in the Australian Consumer Law (ACL) and ASIC Act to 'business-to-business' transactions which meet prescribed criteria.

Your contract will be covered by the new law if it satisfies each of the following.

1. It relates to the supply of goods and services, the sale or grant of an interest in land or financial services and products.

2. At least one of the parties to the contract employs fewer than 20 people (including casual employees employed on a regular and systematic basis) at the time the parties enter into the contract. The relevant number of employees is the number of employees of the legal entity that is a party to the contract. If a company has subsidiaries or other related entities the employees of those companies are not included in the head count.

3. The 'upfront price' does not exceed:

(a) $300,000 – if the term of the contract is 12 months or less
(b) $1 million – if the term of the contract is more than 12 months

Do not be fooled by the term 'upfront price' – it applies to more than just a start-up/establishment fee. It is defined as consideration that is to be provided for the supply, sale or grant under the contract which is disclosed at or before the time the contract is entered into, but does not include consideration that is contingent on the occurrence or non-occurrence of a particular event.

The ACCC has clarified that any amounts which cannot be calculated with certainty at the time the contract is entered into - for example, a royalty fee which is calculated as a percentage of future sales - will not be included in the calculation. The result of this is that many high-value contracts for which the consideration is a royalty stream may also be potentially caught.

Payments which are not referable to the supply, sale or grant under the contract, for example, exit fees, are also not included in the calculation.

4. It is a standard form contract. A contract will be presumed to be standard form, unless it is proved otherwise. The ACL and ASIC Act set out a number of factors which a court must take into account determining whether a contract is 'standard form', including the relative bargaining power of the parties, whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties and whether one of the parties was given an effective opportunity to negotiate.

If this applies to your contracts, then you should review them now to determine whether they contain any terms which could be deemed 'unfair'. The legislation sets out tests which must be met for a term to be deemed unfair. It also gives examples of unfair terms, including a term that permits one party (but not another party) to terminate the contract, a term that permits one party (but not another party) to vary the terms of the contract and a term that permits one party (but not another party) to renew or not renew the contract.

Terms that are found to be unfair will be rendered void and unenforceable.

The new legislation will apply to contracts entered into or renewed on or after 12 November 2016, as well as terms of existing contracts which are varied on or after 12 November 2016 (but not the whole contract, unless it is renewed). It will not apply to existing contracts (unless they are renewed or varied).

D-day is 12 November 2016 so companies have 12 months to get their house in order. Now is the time to review your contracts, check if they are caught by the legislation and if so, get compliant.

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