On 20 October 2015, new legislation was passed that extends unfair contract protection laws to small businesses. Under the new laws, if a court considers the term of a standard form contract to be unfair then it will be declared void.

Such a declaration places the entire contract at risk of being declared void, if the term is essential to the operation of the contract.

The new laws are expected to come into effect in late 2016 and will apply to all new contracts, to renewed contracts, and existing contracts that are varied after this date.

The new laws will have a significant impact on the Australian petroleum industry because of its application to a broad range of petroleum business contracts.

The petroleum industry relies heavily on standard form contracts for service providers, franchising, branding agreements, distribution arrangements, and various other commercial agreements.

All of these standard form contracts will therefore need to be reviewed, and in many cases substantially amended, in order to comply with the new laws.

Which business contracts are effected?
The new unfair contract laws will apply to every standard form “small business contract”. This means a contract where:
a) At least one of the parties to the contract has less than 20 permanent employees at the time the contract is executed; and
b) The upfront amount payable under the contract is:
• $300,000 or less; or
• Between $300,000 and $1 million and the term of the contract is longer than 12 months.
Casual employees will not be deemed “permanent employees” unless their employment is regular and systematic. This point is particularly important for in the petroleum retailing industry given the high use of casual employees.

What makes a contract term “unfair”?
Under the new laws, a contract term will be “unfair” if the answer is “yes” to all of the following questions:
a) Does the contract term result in a significant imbalance between the rights of the parties under the contract?
b) Is the contract term reasonably necessary to protect the legitimate interests of the party that will benefit from the term?
c) Would the contract term, if exercised, result in detriment to one of the parties?
There is no definitive list of contract terms that are deemed “unfair”. However, there are a number of common terms in petroleum contracts that may be considered “unfair” under the new laws, including:
• terms that allow only one party to terminate, renew or amend the contract – these terms are common in franchise and branding agreements;
• terms that allow one party to vary the price of goods and services without allowing the other party to terminate or exit the contract – this term is often seen in petroleum distribution and off-take agreements;
• terms that impose unreasonable liability and risk on one party that is outside the scope of the goods and services – this typically occurs in indemnity and consequential loss provisions on many petroleum contracts;
• terms that limit a party’s right or opportunity to seek remedy or compensation for breaches of the contract by the other party – this is a common risk minimisation tool used in standard form petroleum contracts.

Standard form contracts and the petroleum industry
Standard form contracts will be most affected by the new laws – these types of contracts are frequently used throughout the petroleum industry.

Standard form contracts are typically prepared by one party (usually the larger business) and contain provisions that greatly benefit the party that prepared the contract.

Often, small businesses will be presented with a contract which they must either accept or reject, and there is no room for negotiation.

Unfortunately, the smaller businesses will often execute a standard form contract without obtaining independent legal advice meaning that they generally do not know if the contract is unreasonably unbalanced or “unfair”.

In light of the new laws, Australian petroleum industry businesses should review their standard form contracts to ensure that the terms comply with the new unfair contract rules.

The business contracts that will be especially vulnerable to challenges under the new legislation will be branding, franchise and distribution agreements that are in standard form and are commonly not subject to negotiation.

A key element of contract negotiation – or presentation – involving a small business should be transparency about critical or unbalanced provisions.

In relation to consumer contracts, Australian courts have found that a contract term may not be unfair if it is clearly identified to the other party. It is reasonable to anticipate that same principle will be applied by courts to small business contracts under the new laws.

This article utilises material provided by Moulis Legal. The firm’s Petroleum Law team advises Australian and international businesses on downstream petroleum issues, including retail, production, trade and sales, transport and distribution, regulatory compliance, land contamination, and the management and transfer of petroleum assets.

For more information on this matter, please contact Christopher Hewitt (christopher.hewitt@moulislegal.com), Lauren Gray (lauren.gray@moulislegal.com) , or Alexandra Geelan (alexandra.geelan@moulislegal.com). Or simply call the team on +61 7 3367 6900.

The material contained in this article provides an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted by either Moulis Legal or ACAPMA. It does not constitute legal advice.