Standard form agreements and unfair contracts - how commercial leases are a great example of the need to review your contract

Many small businesses lack the time, resources, expertise and bargaining power to negotiate changes to terms specified in standard form contracts. More often than not they find themselves trapped or at an economic loss as a result.

As the grantor of credit it is imperative to ensure that when you’re extending credit to small business that before any contract is executed both parties are given time to thoroughly review and negotiate terms before signing on the dotted line. This will ensure the contract is robust and allows it to be scrutinised for containing, amongst other clauses, unfair contractual terms.

For some time individual consumers have been protected from unfair contractual terms, with this protection now being extended to certain small businesses.

The Treasury Legislation Amendment (Small Businesses and Unfair Contract Terms) Act 2015 (Cth) (the Act) allows a court or tribunal to determine if a contract term is unfair and, if found to be unfair, provisions making such a term unenforceable or void.

For the Act to apply the following criteria must be met:

  • One party to the contract must be a small business; and
  • The contract is a standard form contract.

The Act will apply to contracts entered into or renewed after 12 November 2016.

What is a small business?

For the purpose of the Act, a small business is determined by two thresholds:

  1. At the time the contract was entered into at least one party to the contract is a business that employs fewer than 20 persons; and
  2. Either the upfront price payable under the contract does not exceed $300,000 or the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

There are some specific contracts that have been excluded from the Act. However, these are not relevant in the context of commercial leases.

What is a standard form contract?

Unfortunately, there is no clear definition for what a standard form contract is. However, a number of factors are taken into consideration including:

  • The relative bargaining power and opportunity to negotiate upon the transaction taking place;
  • If the contract was pre-prepared by one party;
  • If the contract was presented as a “take it or leave it” contract; and
  • If the terms of the contract either do not consider the characteristics of the parties to the transaction, or consider characteristics of a non-related third party.

Given that the determination of whether a contract is a standard form contract is largely circumstantial it is important to document all correspondence had during the transactional process.

What is an unfair term?

Ultimately, the court or tribunal will determine whether a contract term is unfair although consideration of the following will be had:

  • Whether the term is transparent;
  • If the term causes detriment;
  • If a term would cause a significant imbalance in the rights and obligations under the contract; and
  • Whether the term is necessary to protect the legitimate interests of a party who would be advantaged by such a term.

Further guidance as to what may be considered an unfair term can be found in the Competition and Consumer Act 2010, and Australian Consumer Law in addition to Australian Securities and Investment Commission Act 2001 (Cth).

The 2-year Review …

In November 2018, 2 years following the operation of the Act, the Treasury opened a review into the Act allowing for submissions to be made on the current thresholds set in addition to the coverage of the Act. Multiple submissions were made from a variety of sources wherein key issues were identified with the operation of, and actual protection afforded by, the Act. It is anticipated that the Treasury will make recommendations which further expand the reach of the Act as well as the consequences of breaching the Act. However, no report has been published as yet.

Conclusion

Whilst the Federal Government is ensuring that small businesses are afforded better protection when entering into contracts there is insufficient case law to provide clarity on whether a particular standard form commercial lease agreement’s terms are compliant. However there is a pervasiveness of standard form agreements in the commercial property sector.

As stated earlier it is always best practice to make sure that both parties have time and seek advice to ensure any contract entered into is thoroughly reviewed and effectively negotiated before being executed.

For a supplier with standard form agreements we suggest it’s worthwhile to review agreements from the point of view of enforcement and ask:

  1. Are there any standard terms?
  2. Are there any client-specific terms?
  3. Are the terms in line with the culture and practice of the business?

With the current difficult economic trading conditions, commercial real estate agreements and their associated suppliers will be impacted first. Moreover it is prudent business practice to have independent review of your terms and conditions on a regular basis to ensure both regulatory compliance and current best business practice.

 

  • John Gdanski
  • Partner
  • SLF Lawyers:
  • E: jgdanski@slflawyers.com.au
  • T: 61 3 9600 2450

 

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