Does your business utilise terms of trade for B2B transactions? Were they drafted before 2022? If so, you should review them for compliance with current legislation on unfair contract terms.
Many people are unaware of some significant legal changes that took effect last year. These concern prohibitions on unfair contract terms under the Fair Trading Act. Previously, such restrictions only applied to business-to-consumer contracts.
As of 16 August last year, this has been extended to certain business-to-business agreements.
In this post, we will explore the key aspects of the rules, the types of terms to be cautious of, and the potential consequences of non-compliance.
When are B2B terms of trade captured?
Unfair contract terms are prohibited in business-to-business contracts meeting the following criteria:
- The contract takes a predetermined, non-negotiable form (like most terms of trade).
- The trading relationships will be less than $250,000 (including GST) within 12 months of the contract.
The types of clauses that cause trouble
A contract term may be unfair if it creates a significant imbalance between the parties. These terms can include, but are not limited to, one-sided rights to renew, vary or terminate contracts. Clauses imposing penalties also need to be examined very carefully.
What are the consequences?
Unfair terms may be subject to legal challenge, rendering the term unenforceable. The Commerce Commission may also apply to the court for a declaration that a term is unfair. All of this can result in financial losses and reputational damage.
Review your terms
We frequently encounter terms of trade that have yet to be updated for the new law. If you fall into that category, you should be reviewing them now. It may well be that only small changes are needed, but the failure to make them could have costly consequences.
How much will it cost you?
The cost of having your terms of trade reviewed can vary depending on the complexity of the contract and the time required for the review. As a general guide, you may need to allocate anywhere between $1,200 to $2,000 in legal costs for a comprehensive review and, if necessary, the redrafting of typical terms of trade for a small business.