In November 2016, the unfair contract terms legislation was extended to protect “small business contracts”. As a result, unfair contract terms included in small business contracts can now be declared void and unenforceable.
As a result of these legislative changes, the four big banks have made changes to some of their small business contracts to ensure compliance with the unfair contract terms regime. The four big banks’ recent amendments to their contracts reflect the importance of the unfair contract terms regime and the necessity for all businesses to review their standard form contracts.
Some of the changes instituted by the banks include:
The removal of 'entire agreement clauses' from loan documents that absolved the banks from responsibility for conduct, statements or representations they made to borrowers outside the written contract;
Limiting the operation of indemnification clauses which originally worked to broadly protect the banks against losses, costs, liabilities and expenses that arose, even outside the control of the small business borrower;
The removal of clauses which gave the banks power to demand repayment of a loan for an unspecified negative change in the circumstances of the small business customer (known as 'material adverse change event' clauses); and
Limiting the bank’s ability to vary contracts to specific circumstances, and allowing consumers 30-90 days to exit a contract if such variation caused them to want to exit.
To adequately understand the contract changes implemented by the big four banks, it is worth revisiting the basics of the unfair contract term regime, so far as it extends to small business contracts.
What Constitutes a “Small Business Contract”?
A “small business contract” caught under the unfair contract terms regime involves the following:
A standard form contract for the supply of goods or services, or the sale or grant of an interest in land;
At least one party to the contract is a business that has less than 20 employees; and
The upfront price payable under the contract is not more than:
$300,000; or
$1 million, if the contract is for more than 12 months.
What is an “Unfair Term”?
A term in a “small business contract” is considered unfair if it:
Would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
Would cause detriment to a party if it were to be applied or relied on.
Practical Implications
The four big banks’ choice to make these specific changes to their standard form contracts reflects the importance of the unfair contract terms regime and the necessity for all businesses to review their contracts to ensure compliance with the extended law. If a term is found to be unfair in a small business contract it will be void and unenforceable, which can have a detrimental impact on any business.
Cowell Clarke has extensive experience in drafting and reviewing contracts for businesses of all sizes and in advising small to medium sized businesses of their compliance requirements. Please contact Megan Jongebloed or Katie Pote to review your standard form contracts to ensure they comply with the unfair contract terms regime.