Unfair contracts are now officially illegal; do yours comply?

by | Dec 21, 2023

I’m a firm advocate of the old but trusty PESTLE framework. It’s an easy-to-use method that SME owners and managers can use to uncover things happening in the wider world that could affect their business.

PESTLE stands for:

  • Political
  • Economic
  • Social
  • Technological
  • Legal
  • Environmental.

In November, a LEGAL help for SMEs finally became law. It’s something that I have written and spoken about for years, so it’s very gratifying to see the final result of all that lobbying by SME advocates and organisations (such as the Australian Small Business and Family Enterprise Ombudsman).

At last, it is illegal to have unfair terms in a contract with a small supplier.

November 9, 2023, marks a significant shift in the Unfair Contract Terms (UCT) regime. The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 introduced some critical changes:

  • The definition of a ‘small business’ is widened
  • Unfair Contract Terms will be illegal and will be met with stern penalties.

If you are a supplier to a larger business, there’s a chance that the contracts you have signed will now be illegal.

If you’re running a business and buying from SMEs, you might be caught by these changes yourself. A ‘small business’ is defined as any entity with fewer than 100 employees or an annual turnover under $10 million.

So, what does this mean for your standard form contracts? They’re presumed to be under this umbrella unless proven otherwise.

Previously, if your contract had an unfair term, it was simply unenforceable—no harm, no foul, right? Not anymore. The new legislation introduces hefty fines just for including such terms in contracts. Companies could face penalties up to the greater of:

  • $50 million,
  • three times the benefit’s value, or
  • 30 per cent of the company’s turnover when the contract was in place.

Individuals are not spared either, with potential fines up to $2.5 million.

What is Unfair?

It’s crucial to go through your contracts with a fine-tooth comb. That includes both the contracts with your customers and contracts with your suppliers.

Look for any terms that might be considered unfair. Here’s some pointers:

  • Clauses that skew the balance of rights and obligations
  • Clauses that are not necessary to protect legitimate interests
  • Clauses that give one party some rights or benefits that the other party does not have.

An example, and one that I see often, is where buyer can terminate a contract anytime, for any reason, while the supplier must give notice. This kind of imbalance could now be a costly oversight.

These changes open the door for any SME or individual to take civil action if they’re on the receiving end of a UCT. With the Fair Work Commission potentially getting the authority to make orders regarding UCTs in ‘service contracts’, the world of supplier contracts has changed.

Of course, we must now wait and see what actually unfolds in the Courts as cases are brought before them. Regardless, all businesses must brace themselves for this regulatory change.

It’s about more than just the legals

Ensuring your contracts are fair and balanced isn’t just about legal compliance; it’s a matter of upholding your brand’s integrity. Ethical dealings and fair practices are always in vogue, and the cost of ignoring these new rules goes way beyond the hefty fines. Your reputation is also at risk.

Now, your attention to the “L” in the PESTLE analysis is as important as your entrepreneurial spirit. Consider this article a call to action: live up to your brand, embrace ethics, and ensure your contracts reflect that commitment. November 9, 2023 has already passed, so the time to review and adjust your contracts is now.

This post first appeared on https://insidesmallbusiness.com.au on December 21, 2023.