Big businesses that use unfair standard form contracts with small firms and consumers will have approximately 12 months to rewrite their agreements before they face substantial penalties for the first time.

On 27th October 2022, Parliament passed new laws prohibiting the use of “unfair contract terms” in standard form small business contracts. The new laws have important implications for both large and small businesses.

For small businesses, they provide protection against commercial bullying by larger suppliers or customers with which the small business must deal. For their part, big businesses will have to demonstrate a willingness to negotiate contract terms with their smaller suppliers or customers.

Prior to these new laws, the courts could declare specific terms of a contract unfair and therefore void, but unfair contract terms were not unlawful as such, so the courts could not impose any penalties on businesses that used them.

The new laws act impose penalties (as outlined below) on businesses that include unfair contract terms in their standard form contracts with consumers and small businesses.

The new laws rely on 3 key concepts:

  1. There must be a “small business contract” – where one of the parties to the contract employs fewer than 100 people (up from 20) and has an annual turnover less than $10 million, and any upfront price payable under the contract does not exceed $5 million.
  2. The contract must be a “standard form contract” – there are a number of factors that determine whether this applies, but in simple terms a contract is likely to be in “standard form” if it is presented to the small business on a largely non-negotiable basis.
  3. The contract must contain “unfair” terms. That will be the case where:
    – the terms cause a significant imbalance in the parties’ rights and obligations;
    – the terms are not necessary to protect the legitimate interests of the party that would be advantaged by them; and
    – the terms would cause detriment (financial or otherwise) to a party if the term were to be relied on.

In addition to striking down or varying unfair small business contracts, the courts will now also have the ability to impose financial penalties on offenders, up to the greater of:

  • 50,000 “penalty units” (currently $110 per penalty unit, or $5,500,000)
  • Three times the benefit derived or detriment avoided by the perpetrator (if capable of determination by the court); or
  • 10% of the perpetrator’s annual turnover, up to 2,500,000 penalty units

What next?

The new laws will commence on 9 November 2023. They will apply to standard form contracts entered into following that commencement date, and also to any existing contracts that are renewed after that date.

The purpose of the delay between enactment of the laws and their commencement is intended to give businesses time to review and adjust their contracts and practices.

Any larger businesses that use standard form contracts in dealing with their smaller suppliers and customers should use this grace period to review both their documentation and the way they deal with those smaller parties.

If, on the other hand, you are a small company, you will need to think about how to ensure you enjoy the full protections of the new laws, without prejudicing the commercial relationships on which your business is based.

If you have any queries or would like further information please contact the team at Antcliffe Scott.