#142 You Can't Afford To Get This Wrong
There have been some big changes this month to do with the rules that govern your contracts in business. And I know - listening to facts about Australian Consumer Law can be dry. However, staying up to date with this is crucial to ensure your business avoids the risk of any legal pitfalls. In this episode, I talk you through the recent amendments to the law and how these impact small businesses - and trust me, you can’t afford to get this wrong.
A new piece of legislation came into effect on 9 November, which brings in some new rules that apply to every small business. Those with less than 100 employees or under 10 million in annual turnover are regarded as small businesses. So, if this is you and you’re issuing agreements to your clients, you need to take great care to ensure that the terms you include in those agreements aren't unfair.
The new penalties for unfair contract terms are huge - and should someone be unhappy with what’s in your contract, the court can absolutely impose them. I dive into real-life contract scenarios to illustrate what constitutes an unfair term, making it easier to identify and rectify similar issues in your own contracts. The key takeaway? Both parties in a contract should have equitable rights and opportunities, and contracts should be flexible enough to adapt to changing business or client needs.
If you’re a long-time listener of this podcast, you’ll have heard me say a lot that prevention is better than cure. And with these recents changes in the law, it couldn’t be more relevant. Whether you used a template, consulted Google or engaged a professional to draw up your legals, it’s time to do a review and check that they’re compliant. Having confidence in your legal documents will give you that much-need peace of mind, knowing that they will stand up in court and protect you if ever challenged.
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Tracey: [00:00:00]
Hello, everyone. Welcome back to another episode of the Rise Up in Business podcast. There have been some big changes this month to do with the rules that govern your contracts in business. I'm going to dive in, in this episode and share with you exactly what you need to know, and I'm going to share what you need to do to make sure you can still rely on your documents, on your legals, on your contracts in your business when you need to.
On this podcast, I talk a lot about prevention is better than cure. I share with you my experience. I give you my background. So you know that [00:01:00] I'm all about protecting small business owners so that they don't need to call a lawyer like me later when things go wrong. And one of the pivotal ways that you protect yourself and that we work together so that you are protected in your business is to make sure you have legals, and when I say legals, I mean contracts, T's and C's, agreements to make sure you have legals that are going to hold water when they need to. That they're going to stand the test of time and they're going to protect you and do what they need to do to protect you and your business. All right, let's dive in.
So if you're a long time listener, you've heard me talk about time and time again, the Australian consumer law. And I know that a lot of people, when they hear it, their eyes glaze over and they think, Oh, Tracey, I know it's important, but I'm not listening. Australian consumer law, dry and boring. Well, it may be dry and boring, but part of my purpose in my business and on this podcast is to break it down for you in a way that's easy to listen to so that you don't [00:02:00] find it dry and boring.
The Australian consumer law is really important because it governs how it is you engage with your clients and what it is you need to do and not do with your documents. So with your legals. There've been some changes to the rules governing what you do with your legals. And so that happened earlier this month.
And that is the purpose of this podcast episode. Clients say to me when they come along, Is my agreement any good? Is it lawful? Is it legal? Is it going to hold up? And I can have a look at it fairly quickly and tell you it's falling short. It's not doing the things. I'll ask you some questions and I'll tell you that's not consistent.
You're telling me you operate this way, but you actually operate that way. That means that if you're not acting consistent with your documents, you are going to have problems later. Clients will often say, well, I have a template or I copied someone's, or I spent a lot of time Googling and I put something together.
Chances are, if you've done those things, your documents, aren't going to work for you the way they need to in your business.[00:03:00] Once though you do get documents properly drafted and properly tailored for your business, it's not set and forget forever. So it is set and forget that you've got peace of mind, and you don't have to worry about them every week.
But you do need to revisit them on my advice, either annually, once a year, or when something changes. So you do need to revisit them to make sure they're still current, they're still up to date, they're still doing all the things. And when there's a change in the law, or a change in the rules like there is now, that is also when you need to revisit.
So now is the time to revisit your contracts, your agreements, your legals, to make sure they're doing all the right things. So what changes, Tracey, are you talking about? I know you're busting to know. When I talk about the consumer law, and bear with me because I'm just going to give you some legal speak here, but when I talk about the consumer law, where [00:04:00] does that sit?
It sits under the Competition and Consumer Act. So it sits under a piece of legislation. Well now, since earlier this month, there is a new piece of legislation. So there's a new piece of legislation that also has some rules. And that piece of legislation is called the Treasury Laws Amendment, More Competition, Better Prices Act 2022.
Came into effect on the 9th of November. What that act does is it brings in some new rules that apply to probably just about everybody listening to this podcast, because this is for small business owners. And those rules say, here's the first part of the changes. Those rules say that the small businesses that used to be exempt from these rules, which was probably the majority of listeners, they're no longer exempt. These rules now apply. This is really serious. So that's pretty much all of us because we're now regarded as being a small business for this, for these rules if we have less than 100 employees, or we [00:05:00] have less than 10 million annual turnover. That's just about all of us. If we're issuing our agreements to our clients, it means that we need to take great care to make sure that the terms we include in those agreements aren't unfair contract terms.
And the phrase unfair contract terms is actually defined and this rule now applies to all small businesses, less than a hundred employees, less than 10 million in turnover. So yeah, it's probably you. So what is an unfair contract term? Let me just start with that to give you some context around what it is that you absolutely must avoid in your agreements. So it's something that causes you to have more power than the client. So a significant imbalance in the rights of both parties. It's something that you include that's not actually reasonably necessary to have in there. The law actually look at this. What is reasonably necessary to protect the interests of the [00:06:00] parties?
Have you got terms in your agreements that aren't reasonably necessary? If you have, they may be deemed unfair and is it going to cause a detriment? So is it, is it a negative for one of the parties? Is it going to cause a financial detriment or some sort of other detriment to your client? If you rely on that term or that clause.
So that's the high level answer to the question. What is an unfair contract term? Let's dive in though and break it down a little more. So I'm going to give you some examples, some real life examples of what I've seen recently in contracts that are unfair. Most recently, my client entered into, a long time ago, without legal advice, a contract whereby she was not given the right to terminate. So the other party was given the right to terminate, but she had no right whatsoever to terminate, for breach or otherwise. So if the business didn't provide the services, my client still wasn't entitled to terminate. Then there was a penalty clause saying, but even though [00:07:00] you're not entitled to terminate, we are the only one that can terminate if you do fail to pay. So essentially a termination if you stop paying or then everything becomes payable, even if we haven't done anything.
And we can change the prices at any time we like, and then we don't have to consult with you, and there's nothing you can do about it. And even if we change the prices and you're not happy, you still can't leave. And you have no right to approach us to seek to amend the terms of this agreement. Only we can do that.
This is a real life contract. This is something that someone actually signed, albeit she didn't read it. But that's a contract that a business has that they've sent out into the world, people have entered into it and now they think it's okay. Well, it's not okay. And we're going through the process now of challenging those terms.
We're saying the whole thing ought to be set aside. So the most common examples I see that come across my desk when clients reach out for advice on contracts they've entered into are things like unfair [00:08:00] termination clauses. The most common one is where only one party's got the right to terminate. And it's usually the business. That's unfair.
Both parties should have an exit strategy. I'm a real advocate for an exit strategy. I don't think you should enter into any transaction without being crystal clear on your exit strategy. I talked to clients a lot about exit strategies and in when we're talking contracts like we are here, that means a termination clause.
So both parties need to have the right to terminate and what does that look like? The next one that I see most frequently is not allowing the client the right to approach you to seek to vary or amend the contract. There absolutely should be a variation clause where there's a process that a party needs to go through if they want to vary.
And the reality is, that's life. Things change in business in life. So we need to make allowance for that. So you should have in your agreement, a variation clause, which allows the client to approach you and have a process in place if things change or if they need to vary it. It's unfair to exclude that, it's unfair [00:09:00] to offer that only to the business and not to the client.
That's the second most common one that I see. And the third most common thing I see, which is an unfair contract term that comes across my desk a lot, is the right to increase prices with no discussion or notification and no right for the client to choose to exit if they're not happy with it. So sometimes you will have seen a contract from time to time, no doubt that says you're locked in for this period. I can put the prices up anytime I want. And there's nothing you can do about it.
That's unfair. Of course, we need to be able to revisit our prices and I totally accept that. That's the reality of business. But when drafting those clauses in your agreement, we need to make sure that we're sharing with clients, in certain circumstances, we may increase our prices or we may revisit our prices.
We will let you know. And if the client's not happy with the increased price, they need to be free to leave without penalty. You can't penalize them because they don't agree to your price [00:10:00] increase and they don't want to work with you anymore. They need to be free to leave if you've increased your prices and they're not happy with it.
So that's the third most common example that I see. The big one here, the big, big change here that's come into effect this month is penalties. So there are now penalties that the court can impose on a business if they have contracts with unfair terms. Previously, there were no civil penalties. So you didn't get, it's not a fine, but let's call it a fine.
It's like a fine. So I'm monetary penalty. So before, there were none, there was no penalty, but now there are and they're big. So if you don't get this right, depending on the circumstances, you can be subject to a really big penalty. The maximum penalty for an individual is two and a half million dollars. [00:11:00] Kid you not.
There's also another formula for working out penalties, because it can actually be more than two and a half million. If you apply this particular format. The court has the right now to use a formula diving into potential benefit under the contract, diving into turnover, diving into the reasonably attributable benefit under the contract. I won't go any further there other than know that the penalties range from around 50, 000 up to two and a half million, and it can be more.
So the courts have the ability now to impose those penalties and issue with an order only if someone applies, it doesn't just happen out of the blue and you don't just get something in the mail, only if a party applies to the court, but this is exposure. This is exposure for a business owner because these things are real now, and if someone is really unhappy with the contract terms, they can actually apply to the court for several remedies. One being this type of penalty and the courts can give it. [00:12:00] Next, which is significant, next to the penalties is the courts have greater power now on what they can do when someone applies to the court to challenge the agreement.
So before the courts could say, yes, I agree. This particular clause is unfair. We will erase that clause. It's called void. We'll void that clause. So we'll erase that clause and the rest of the agreement stands. Now the court's got the to declare the whole agreement void. So to erase the whole agreement, If it thinks that it should based on unfair contract terms, that's significant for a business owner, because if that happens, if you've got unfair contract terms in your contract and a client challenges it and heads off to court, the court no longer just looks at it and says, okay, I'll take clauses one, two, and three, the rest stands.
The court can now say, you know what, I'm going to set the whole thing aside. And now you've got nothing. So this is why it's so important to make sure that when you are[00:13:00] having your documents prepared, you're having them prepared properly for your business and tailored, you're not buying templates, you're not Googling, you're actually having them prepared properly for your business.
You're getting them prepared by somebody like us, like me, who loves these things and who niches and specialises in small business contracts. And then make sure you're working with someone who takes the time to explain to you, what this contract does, what it means, what are these clauses? You are the one that wants to be empowered at the end of this process. You need to be confident that you've got protection and that you know what your documents are doing.
Once you've done that, you've got peace of mind because you know that your provisions, your clauses and your agreements are not going to be set aside because they're unfair. You know your entire agreement is going to stand up. It's not going to be set aside and you then know you're not going to be left exposed without a contract because the courts have set it aside because it's got unfair terms.
So that's where you get your peace of mind. So, [00:14:00] like I said at the beginning, working with your contracts in your business, your legal documents, it's not set and forget forever. So you do need to revisit them every now and then. Now is the time where it's worth a revisit. So what do you do now? Tracey, you told me all of this.
Thanks so much. This is a little unnerving. There's actually penalties here. I realise how I could be exposed and my agreements could be set aside. What do I do now? You do a few things. One, you get out your agreements and you review them. Who drafted them for you? Where did you get them? Were they done properly?
If they were drafted for you by a professional, reach out, ask them the question, are these all compliant with the new changes? If you haven't had them drafted by somebody, if you did buy a template, or if you did Google or borrow somebody else's now, my friend, would be the time to reach out to your business lawyer.
And that can be me. If you like, reach out, have a conversation. Hey, Tracey, can you look at my agreements for me, please? Are they compliant? Do they do the [00:15:00] things? Do they contain unfair contract terms? Am I exposed? Reach out to someone you trust. Have the conversation. Now is the time for the review. When I say review documents annually or when things change, this is a change, so now's the time for a review.
Get someone to look at them for you, get the advice, know what you're dealing with, so you know whether or not you need to have them amended. Like I say so often, prevention is better than cure in business. And that couldn't be more true. Take the time to know that everything you've got in place Is as it should be, doing what it should, so you've got peace of mind and you don't have to worry.
I hope you found that helpful. I know there's a lot to unpack here. I have condensed so much legislation and so much legal speak into a really short episode on the podcast, just to bring to your attention, something's changed. This is what it is. This is what you now need to do because these are the penalties now, if you get it wrong. So honestly, with these [00:16:00] penalties, you just cannot afford not to get this right. Please don't hesitate to reach out. If you want to have a chat, if you've got questions. You can book in directly via the website.
The links are in the show notes. I'd love to hear from you. And as always, thank you so much to everyone who reaches out to provide such beautiful feedback on the podcast. It means the world. Thanks so much for listening. I'll catch you next time.
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