Unfair Contract Terms in Small Business Agreements
Unfair contract terms are a growing concern for small businesses in Australia. These terms can put smaller enterprises at a disadvantage when dealing with large companies, often leading to costly disputes and financial risks. Under Australian Commercial and Corporate Law, specific protections exist to prevent businesses from being exploited through contracts. This article explains what unfair contract terms are, why they matter, and how small business owners can safeguard themselves from unfair agreements.
What Are Unfair Contract Terms?
Under the Australian Consumer Law (ACL), a contract term is considered “unfair” if it:
Causes a significant imbalance in the rights and obligations of the parties;
Is not reasonably necessary to protect the legitimate interests of the party who benefits from the term; and
Would cause detriment (financial or otherwise) to a party if it were enforced.
Common examples include:
Clauses allowing one party to vary terms unilaterally without agreement;
Limitations of liability for one party only;
Automatic renewal clauses without clear disclosure.
Small businesses often lack the bargaining power to negotiate contract terms with larger organisations. This imbalance can lead to “take-it-or-leave-it” standard form contracts, where small businesses feel compelled to accept unfavourable conditions just to secure work.
For example, a supplier agreement that allows the larger business to change pricing or delivery terms without notice is unfair but common in practice. These terms can impact cash flow and profitability, placing small businesses at significant risk.
Legal Protections Under Australian Law
The ACL, part of the Competition and Consumer Act 2010, provides strong protections against unfair contract terms. Initially, these protections only applied to consumers, but since 2016, they have extended to small businesses. A small business is generally defined as having fewer than 100 employees or an annual turnover under $10 million.
From 9 November 2023, changes to the law introduced penalties for businesses that include unfair terms in standard form contracts. Previously, unfair terms were void but not penalised. Now, businesses can face substantial fines for non-compliance.
To determine whether a term is unfair, courts consider factors such as:
Transparency of the term;
The overall rights and obligations of both parties;
Whether the term is necessary to protect legitimate interests.
Examples of Unfair Contract Terms
Unfair terms can appear in various agreements, including supply contracts, franchise agreements, and service contracts. Common examples include:
Unilateral price variations: Allowing one party to change pricing without consent.
Limited liability: Restricting one party’s liability while holding the other fully accountable.
Termination without cause: Giving one party the right to end the contract at any time, without valid reason.
Exclusive clauses: Forcing a business to use a single supplier without flexibility.
Identifying these terms early can save your business from disputes and financial losses.
How to Protect Your Business
Small businesses can take several steps to reduce the risk of being caught in an unfair agreement:
Review contracts thoroughly: Never sign a contract without reading and understanding every clause.
Seek legal advice: Engage a qualified lawyer specialising in Commercial and Corporate Law to review or draft your agreements.
Negotiate terms: Push back on clauses that create significant imbalance or risk.
Use plain language: Ensure contracts are written in clear, understandable terms.
Stay informed: Keep up to date with legislative changes regarding unfair contract terms.
Unfair contract terms can have severe consequences for small businesses, from financial losses to legal disputes. Understanding your rights under Australian Commercial and Corporate Law is essential for protecting your business.
If you suspect a contract contains unfair terms, act now.
Contact New South Lawyers today for tailored advice and ensure your agreements are fair, compliant, and protect your interests.
