Consumers are already protected under the Act from unfair terms in standard form consumer contracts, but this latest development now goes beyond consumer protection to affect trade dealings between businesses.
A contract will be considered to be a small trade contract where the contract is between businesses that are engaged in trade, and that trading relationship does not exceed an annual value threshold of $250,000. This test will require an assessment as to whether, at the time the business relationship is first formed by contract, $250,000 or more within any 12 month period is more likely than not to become payable.
A small trade contract will be considered to be a standard form contract if it has not been subject to effective negotiation, and/or where there is a power imbalance between the parties. It is likely that many businesses’ terms of trade would constitute a standard form small trade contract.
The existing test for whether a term in a standard form consumer contract is unfair will continue to apply to standard form small trade contracts. This means that a term in a standard form small trade contract will be declared to be unfair where the court is satisfied that that term:
- would cause a significant imbalance in the parties’ rights and obligations under the contract;
- would cause detriment (financial or otherwise) to a party if it were enforced; and
- is not reasonably necessary to protect the legitimate interests of the party which the term favours.
By way of example, it is likely that a term would be considered unfair where that term:
- allows only one party to renew, end, or vary the terms of the contract;
- penalises only one party for breach or termination of contract; or
- limits one party’s ability to sue the other.
If a court declares a term unfair, that term must not be included in a standard form contract and must not be applied, enforced or relied on. Doing so would be an offence under the Act which is punishable by a fine of up to $200,000 if an individual or $600,000 if a body corporate.
We recommend that all businesses review their contracts and terms of trade to determine whether any terms are likely to be considered to be unfair once the changes to the Act take effect. If any changes are required, those changes should be made as soon as possible. Get in touch today and one of our specialist lawyers would be happy to assist.
This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.