What SMEs need to know about business contracts

By Philip Salakas – Lawpath

Falling victim to unfair contract terms is a regular pitfall for small business operators. Contracts are often confusing for the uninitiated and there’s some key things you should look out for before signing on the dotted line.

SME Contracts

Small business contracts are usually standard form which means they’re prepared by one party.  They’re not usually negotiated and are simply take it or leave it agreements. Small businesses usually operate on this basis for financial services or products as it’s more efficient. Unfortunately, SME operators can fall victim to unfair terms if they don’t exercise their due diligence.

Australian Consumer Law Protections

In November 2016 the Australian Consumer Law added extra provisions to protect small businesses in scenarios stemming from unfair contract terms. These protections effectively void contract clauses that are found by the courts to be unfair and release the SME of liability.

The law will apply to small business to business contracts if:

  • At least one of the parties is a ‘small business’ (i.e. employs less than 20 people, including casual employees employed on a regular and systematic basis)
  • The upfront price payable under the contract is no more than $300 000 or $1 million if the contract is for more than 12 months
  • It is for the supply of goods or services or the sale or grant of an interest in land

Spotting an unfair term

A term in a contract is unfair under the new Australian Consumer Laws if:

  • It creates significant imbalance in the parties’ rights and obligations under the contract
  • Not be reasonably necessary to protect the legitimate interests of the party advantaged by the term
  • It causes detriment (financial or otherwise) to a small business if it were to be applied or relied upon

Clauses like this give the dominant party an unfair range of power and are biased by nature. It can be tough to spot these terms and understand the consequences for your business.

Take a look a few examples of what to look for:

Right to Alter a Contract Unilaterally

Say you enter a contract for a loan and the lender’s contract allows them to change clauses at will.  This includes changing fees and interest rates without limitations. Additionally, you don’t have the right to end the contract even if the lender increases the fees.

The imbalance of rights in the contract can cause you financial detriment and it would ultimately be up to a court to decide the legality of the contract. Recognising these terms is an important skill as a business owner. This could allow you to bring this up with your lender or go seek advice from a lawyer.

Automatic rollover

You lease a product from a leasing company for a fixed period. The contract stipulates that your business will be automatically entered into another fixed term lease unless you return or purchase the product. Exiting this new agreement will result in a fee.

This is an example of an unfair term as it allows the leasing company to start a new lease agreement without consent. Again, it’ll be up to the court to decide what is considered unfair.

Options for small businesses

Court procedures can be lengthy and costly for SMEs which is why it’s critical to be able to spot unfair terms pre-contractually and attempt to negotiate amendments. Talking to a business lawyer and getting a second opinion on your contract before signing it is a good idea. This enables you to propose amendments and get clauses clarified and explained clearly. Lawyers can also help you negotiate and even redraft clauses.

Additionally, the ACCC also seeks to enforce and act on reported cases of unfair terms to small businesses. They can even bring when deemed appropriate some cases before the court.  You can also contact them if you believe you have been a victim of an unfair term in a contract.

ASIC is also available to lodge complaints if you believe a financial service provider has used or relied on an unfair contract term.

Don’t forget…

Although there are a lot of channels that can protect you from unfair terms, there is still great value in getting legal advice from a business lawyer before signing anything. This can save yourself and your business a lot of time and put you on the right path in your business dealings.

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