Is your credit application or trading documents unfair? Yes!

The most recent legislative changes to the unfair contracts regime took effect on 9 November 2023. These changes are so significant that we estimate that 95% of businesses in Australia will be affected, including businesses that offer credit terms to their customers.

In 2016, when the first iteration of the unfair contract laws were introduced, the regime was limited in scope. They only applied to businesses with fewer than 20 employees, and the consequences of non-compliance was largely limited to certain “unfair” terms being not enforceable.

The 2023 changes have significantly changed the landscape.

The regime now applies to all standard form contracts (credit applications and trading documents are common examples of these) where any party to the contract has less than 100 employees or less than $10m in annual turnover (capturing the vast majority of B2B trade in Australia). The consequences of non-compliance have also increased, and in addition to unfair terms still being not enforceable, they are now illegal with penalties of up to $50,000,000 per contravention.

This means that simply having clauses in your contracts which are considered unfair (whether or not you might intend to enforce those clauses or not) exposes you to penalties.

There are also other practical problems arising out of having unfair terms in your contracts. We are finding that defendants in debt litigation are raising defences based on unfair contract principles more and more (even when they don’t relate to the real subject matter of the dispute). This is creating additional cost and delay in recovering debts for suppliers.

We are also finding that customers are becoming more aware of their rights under the unfair contracts regime, and for suppliers who have out of date trading documentation, they are receiving more and more requests for amendments (i.e. crossed out clauses when credit applications and T&Cs are being returned by customers) as a result of these changes. Both of these situations can be easily avoided by ensuring that your documentation does not contain unfair terms.

A clause is considered unfair if:

  • it is not reasonably necessary to protect the legitimate interest of a party;
  • it would cause detriment to a party; and
  • it would cause a significant imbalance of rights.

Readability and transparency of clause drafting is also taken into account.

Examples of clauses that have been found to be unfair include:

  • Price variation clauses that give unilateral rights;
  • Liability exclusion clauses;
  • Indemnity clauses;
  • Termination clauses that give rights to one party over the other.

These clauses are common features of credit application and trading documents, and it’s important that you identify if your documents contain these clauses and seek professional advice.

A rule of thumb is that if you haven’t had a legal review of your credit application and trading documents in the last 6 months, then your documentation is almost certainly out of date and will contain clauses that are unfair (and therefore, illegal).

These changes expose businesses to an increased risk of legal disputes and punitive fines, which can have a significant impact on bottom lines.

For further information regarding the unfair contract terms changes, click here:

Article supplied by Robert Shepley – Principle – Results Legal

Tasmanian Collection Service have formed a partnership with Results Legal to provide our clients with the best advice and support in remedial action and/or creation of business terms and conditions and credit agreements. For further information reach out to our Business Development Manager Peter Bignold at [email protected]