Unfair Contracts to Bite Hard

In November 2016, the so-called Unfair Contracts legislation was passed, banning any contract from basically giving one party rights but not the other. But it has been largely ignored because there were no penalties. From November 2023 that has now changed, and the penalties are HUGE. This will affect all businesses, large and small.

The maximum penalties for “unfair contract” breaches by large corporations are the GREATER of:

  • $50 million;
  • Three times the value of the benefit obtained from the conduct;
  • Or 30% of the corporations adjusted turnover during the breach turnover period.

Got your attention yet? This should catch the attention of any senior executive in any large company using so called “Standard Form” contracts with any small business or consumer. There is no limit on the value of the contract, and a small business is defined as one with less than 100 full or part time employees (excluding casuals) or less than $10 million in turnover. Note also that with the addition of the penalties it seems they have revised the definition of a small business from being less than 20 employees to now up to 100 – a much wider net encompassing many medium businesses also.

97% of all businesses are small businesses, and it is estimated that there are still around 8 million non-compliant contracts (down to half of what was estimate in 2016 when the legislation came out, but still a large number).

A “standard form contract” is a contract that has been prepared by one party to the contract without negotiation between the parties. Typical examples include a telecommunications or utilities/waste contracts, as well as standard “take it or leave it” supplier/purchase contracts from large providers to purchasers/suppliers.

The easiest way to identify an unfair contract 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 (right through to stipulating how invoices are done or submitted 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, stipulating unlimited liability etc.
  • Limit the characteristics of the goods or services to be supplied under the contract, i.e “must use XYZ/follow this process to deliver the service”

So what might be some impacts on businesses? This should mean that a company can’t for instance dictate that they pay all suppliers End Of Month 60 days (without negotiating on another term such as the price), or that your energy provider increases their charges within the contract term without giving you the option to drop out.

Other examples applicable to our industry includes that it also removes the ability for one party to unilaterally determine whether the contract has been breached (for example, they can’t wait until payment is due then say we aren’t paying your invoice unless you prove the work is completed – they have an equal obligation to prove to the supplier that the work wasn’t completed).

It also includes that a party can’t limit the performance of the contract nor unilaterally vary the characteristics of the goods or services supplied. This could have a big impact on for instance projects in that the head contractor can’t tell the subcontractors that they have to do the job a particular way or use set processes/procedures, so long as the result is as agreed. It also seems to mean suppliers can’t be forced into accepting EBA’s when supplying another company. The subcontractor could insist on using their own methodologies. That’s not necessarily a bad thing for the head contractor in that it could remove some of the risks they take on by directing the work (and paperwork) be done to their dictated system, instead allowing the subcontractor to use their own systems.

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. Apart from the lack of penalty, the other weakness with the legislation prior to this change was that it required the small company to effectively take their large customer/supplier to court, which was rarely a viable option. It seems like this has now changed and the ACCC can be engaged to check on the fairness of the contract. Based on the business mindset of the current Government, don’t be surprised to see them use these powers and also to start enforcing the penalties.

This legislation could now potentially have very wide implications indeed. Not just the risk of the exorbitant penalties, but it might change the way business is conducted.

Words from the wise

“Your real relationship with your client begins after you have sold them a product” – Chinmai Swamy

“It’s a very sobering feeling being up in space and realise that one’s safety factor was determined by the lowest bidder on a government contract” – Alan Shepard

As always, Onwards and Upwards!

Fred Carlsson

General Manager

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