Beginning in November 2016, provisions in the Competition and Consumer Act 2010 (Cth) originally designed to protect consumers from unfair terms in standard form contracts will be extended to contracts where at least one party is a small business.
The passage of the new laws has important ramifications for parties on both sides of standard form contracts and it is imperative that businesses, including pharmacy businesses, in conjunction with their legal advisers review such contracts prior to the laws coming into force.
Contracts entered into or renewed on or after 12 November 2016 will be subject to the new laws.
Where existing contracts have been amended after 12 November 2016, only the amendments will be subject to the new laws.
Existing contracts which have not been amended will not be affected.
Importantly, the prohibitions only apply to ‘standard form contracts’ that:
- are for the supply of goods or services or the sale or grant of an interest in land;
- are entered into with a small business (a business with fewer than 20 employees); and
- have an upfront contract price of up to $300,000, or $1,000,000 for contracts with a term of 12 months of more.
Interestingly, the new laws do not define the term ‘standard form contract’. However it is generally understood that a standard form contract is one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms – that is, it is offered on a ‘take it or leave it’ basis.
It is likely that most contracts entered into in the course of conducting a pharmacy business will be affected by the legislative amendments, whether the relevant small business is either the pharmacy business itself, or the party with whom it has contracted. Examples of affected contracts may include, contracts with drug and product distributers, IT and telephone communication service providers, labour hire agencies, security firms and cleaning businesses.
What are unfair contract terms?
A term of a small business contract is unfair if it:
- causes a significant imbalance in the parties’ rights and obligations;
- is not reasonably necessary to protect the legitimate interests of the benefited party; and
- causes detriment (financial or otherwise) to the other party.
The new laws provide examples of terms that are likely to be unfair, including terms that enable one party (but not another) to:
- avoid or limit their obligations under the contract;
- terminate the contract unilaterally;
- impose penalties on the other party for breaching or terminating the contract; and
- vary the terms of the contract unilaterally.
Further examples of terms that may be considered unfair include terms that:
- permit one party (but not another) to renew the contract;
- permit one party (but not another) to assign the contract without consent; and
- limit one party’s right to sue or impose an evidential burden on one party.
The following contracts are excluded from the operation of the new laws:
- contracts entered into before 12 November 2016 (unless renewed on or after this date);
- certain insurance contracts (for example, car insurance contracts);
- contracts in sector exempted by the Minister (there are no currently exempted sectors).
The following terms are excluded from the operation of the new laws:
- terms that define the main subject matter of the contract;
- terms that set the upfront price payable for goods or services; and
- terms that are required or expressly permitted by Commonwealth or State law (for example, a term expressly permitted under the Franchising Code or another prescribed Industry Code).
Effect of having an unfair contract term
Ultimately, only a court or tribunal (and not the ACCC) can decide whether or not a term is unfair for the purposes of the new laws.
If a court or tribunal finds that a particular term is unfair, the term will be void. Importantly, the rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.
Mr Jones’ Pharmacy Pty Ltd (Mr Jones’ Pharmacy), a small business for the purposes of the new laws, and which operates two suburban pharmacies, enters into a 12 month agreement with Big Cleaning Company Pty Ltd (Big Cleaning) on 14 November 2016.
The parties agree that Mr Jones’ Pharmacy will pay Big Cleaning an amount of $400.00 per week (the Weekly Rate) to provide cleaning services at each of the pharmacies operated by Mr Jones’ Pharmacy.
The contract contains the following terms:
- the contract will automatically renew if Mr Jones’ Pharmacy doesn’t opt out of the agreement six months before it ends; and
- Big Cleaning can change the Weekly Rate at any time, and Mr Jones’ Pharmacy cannot terminate the contract if it does.
In the event Big Cleaning seeks to increase the Weekly Rate or asserts that Mr Jones’ Pharmacy has renewed the agreement if it doesn’t opt out 6 months in advance in accordance with the contract, it is likely both of the above terms will be considered void by a Court or Tribunal if Mr Jones’ Pharmacy issues proceedings seeking a declaration that the terms are in fact unfair.
In the event Mr Jones’ Pharmacy is successful, the particular terms will be declared void and have no effect. Mr Jones’ Pharmacy will be able to continue to have the services provided by Big Cleaning for the Weekly Rate in accordance with the contract until its expiry. It will not be forced to renew it for a further 12 month period.
Implications for Pharmacy Businesses
Pharmacy proprietors may wish to have their standard form contracts to which they are party reviewed to ascertain whether any provisions may fall foul of the new laws and what advantage may exist in making that assertion to the other party.
Pointon Partners are able to review any contract, whether your business is the supplier or the customer and advise as to compliance with the new laws.
Further, following commencement of the new laws Pointon Partners is able to issue proceedings seeking a declaration that a particular term in a small business contract is unfair and therefore void.
Should you have any query regarding the new laws, small business contracts or any other legal issue affecting your business, please contact myself or Michael Bishop on 03 9614 7707.
Carl Millington, Lawyer, Pointon Partners