You may think that all business contractual terms agreed with another party are enforceable. We highlight a new law that changes that premise and a newly proposed law which impacts on the enforceability of a contract.
Unfair Business Contracts
From 12 November 2016 under the updated Australian Consumer Law, if you are business which regularly employs 20 or less employees (including casual employees) you will not need to comply with unfair contract terms in your business contracts. For this law to apply to you the following conditions must exist:
- The contract must be considered a standard form contract whereby the other party has all of the bargaining power, or there was no real opportunity to negotiate the terms;
- The upfront price or value under the contract for payment is $300,000 or less, or $1,000,000 or less where the contract has a term of 12 months or more;
- The term of the contract is unfair, that is, it causes significant imbalance in rights and obligations, it is not reasonably necessary to protect the legitimate interests of the other party, and it causes detriment.
For example, there are a number of financial covenants in bank loan documents which will not be enforceable because the breach of these financial covenants have no relevance as to whether there is an ability of the borrower to repay the loan or whether there is adequate security for the loan.
New Insolvency Laws Proposed
Proposed new legislation to amend the insolvency laws is likely to take effect by year end which will amend the insolvent trading provisions of the Corporations Act. One of the effects of the law changes will be that:
- Any contract with a clause which allows for the termination of the contract because the company enters into a scheme of arrangement or administration, may not be enforced during the term of the scheme or the administration;
- Orders can be made to prevent contractual clauses being enforced without the consent of the Courts where the company is under a scheme or subject to administration.
Certain contracts will not be subject to these new laws such as certain contracts managing financial risks associated with financial products regulated by the Corporations Act.
Director – Corporate and Commercial
A+F Commercial Lawyers offers specialist legal advice to assist in the establishment, expansion, operation and divestment and acquisition of businesses and corporate groups.