Unfair Contracts legislation (January 2016)

This has largely gone under the radar for most businesses because of the watering down from the original draft (as it passed through the Senate). But that doesn’t mean it is now impotent. The new legislation states that from November 2016, it will be illegal to use standard form contracts for any contract under $300,000 for those spanning less than 12 months, and $1 million for those extending beyond 12 months. What is forgotten is that 97% of businesses are Small businesses. It is estimated that nearly every single contract written by Government and large corporations to businesses employing less than 20 people will be in breach of this legislation.

The easiest way to think of this change is “Do unto others as you would have them do to you” – if your contract doesn’t meet this requirement, it will be illegal. Basically, the contracts are null and void if they give one party (but not the other) the ability to do things, like:

  • Avoid or limit the performance of the contract, including stipulating how the supplier is to provide their products or services (this will be the most interesting one, because it appears that this means suppliers can’t be forced to accept EBA’s etc when supplying to another company, right through to stipulating how invoices are done etc).
  • Terminate or vary the terms of the contract
  • Apply penalties against the other party for breach or termination
  • Limit the other party’s legal rights, for instance right to sue or how to sue, whether to renew or not renew the contract, unilaterally vary the price etc.
  • Limit the characteristics of the goods or services to be supplied under the contract, i.e “must use XYZ”
  • Limit one party’s liability for its agents.

Most supply agreements have been developed by lawyers and managers who have had no interest in fairness, instead focussing on shifting risk. These contracts will be declared void in November, and have no effect, that is, not able to be enforced.

My experience is that the more words in the contract, the worse it is for both parties. Because the author has tried to cover themselves for as many issues as they can think of, they’ve left themselves open on everything else they couldn’t foresee. Now, finally, it seems that we’ll see a re-think in how business should be conducted. I’ve been a proponent for years that the best thing Government could do would be to make some basic (even 1 page) “Standard Business Contract” that brings back fair. And let’s face it, the only time two parties should have to revert to the details of a contract is when all other avenues of trying to work together have been exhausted. At that point, your business relationship is stuffed anyway.

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