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Unfair contracts in strata

14 Dec 2016

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As part of the Australian Consumer Law, the Federal government has created legislation to protect parties who are the recipient of goods or services under unfair (or one sided) contracts. 

This law has applied to individual consumers for some time. 

The laws now apply to protect small businesses as well. The laws protecting small business commenced on 12 November 2016 and apply with respect to contracts entered into, or renewed, after that date. The laws will also apply to contracts varied after that date but only on the varied terms.

There are some threshold issues that you need to get to grips with as part of this new regime.

The starting point is you can be both benefited and burdened by these new rules. As a consumer (if you are a small business) you now have the protection of them. As a business who supplied of goods or services, you were always subject to them.

Who does the new law protect?

It protects small businesses. A small business is defined as having less than 20 employees. 

Interestingly, the actual Federal Act (yes we have read it) defines ‘business’ as including an entity not carried on for profit. Bodies corporate are not carried on for profit, but they are prohibited by the BCCM Act from carrying on a business. On that basis, we think there is a substantial threshold issue for bodies corporate even having the protection of the new laws as a receiver of services if they are not a small business. 

Otherwise, the new laws create protection for most strata managers (other than the big ones) and almost all resident managers.

There must be a small business contract

This is defined by reference to the ‘upfront price payable.’ A contract will be caught if it is for less than 12 months and the amount payable under it is $300,000 or less. If a contract is for more than 12 months, the amount payable under it needs to be $1 million or less for it to be captured by the new laws.

We are getting questions (already) about how the new laws apply with respect to long-term management rights agreements. If a body corporate is a small business, a management rights agreement would only be subject to the new law if the total amount payable by way of caretaking remuneration under it over the entire term was $1 million or less. 

The contract must be standard form contract

The law only provides protections with respect to ‘standard form contracts.’ There is no absolute definition of this. What is given as reference is a range of criteria to consider. 

The essence of a standard form contract is one which is offered by a supplier to a range of consumers generally on a ‘take it or leave it’ basis. Other criteria include whether one party has all the bargaining power, whether discussion around the contract occurred, whether there was an opportunity to negotiate and whether the contract is specific to the transaction, or a template one.

The type of terms which are unfair

Unfair contract terms are ones which:-

  • Cause a significant imbalance between the rights of the parties

Examples here are where one party can terminate at any time but the other cannot. Another example is unilateral right to vary the contract without consent. 

For us, it boils down to the right of one party to do something under the contract which the other cannot (especially when there is no reason the other should not be able to exercise that same right).

  • Are not reasonably necessary to protect the legitimate interests of a party

This would include exclusions of liability, automatic extensions, forfeiture of monies that were not earned and clauses which hold you to account for the actions of someone you might assign the contract to.

Is the obligation needed or it is just going over the top?

  • Would cause detriment (financial or non-financial) if the business tried to enforce them

The prime example here is liquidated damages. These are amounts agreed to be paid on the occurrence of certain events that might not represent actual the financial loss related to the event.

  • Might not be transparent

This one is easy. Fine print, weasel words and legalese all fall into this category.

How you enforce your rights

If a contract is caught and it contains an unfair term, a court can make a declaration to that effect which renders that term unenforceable. You can also commence proceedings in your own right or involve the ACCC in some circumstances.

Enforcement of rights does not mean the contract is terminated. It means that the unfair contract term itself is unenforceable. 

So what does it mean for strata?

Time will tell, but in reality, we think not much. The lot entitlement proposal will be much more exciting.

Bodies corporate

We think bodies corporate probably do not have the protections offered by the new laws based on the statutory definitions.

Even if they did, we think the reality is that there are very few body corporate contracts that would be considered to be standard form contracts. This is because almost all agreements of any consequence need to go to a general meeting for approval and all are capable of being negotiated or refused. This applies to management rights agreements and strata management contracts as well as contracts for building works, renovations or maintenance. 

Strata managers

While the SCA might issue a standard form strata management contract, not all strata managers use them as they are not all members of the SCA. Even if they do, bodies corporate have the right to negotiate these contracts before they are put to a general meeting. Committees can ask for an extra few committee meetings, negotiate the rates or PPS charges and so on. These are not usually ‘take it or leave it’ propositions.

Management rights owners

There is no such thing as a standard form management rights contract. We obviously see more of certain styles of format produced by certain law firms than others, but each one is usually tailored to the scheme itself. This means that a management rights contract is not likely to be a standard form contract. The other issue is the long-term nature of them means that most will fall outside the financial thresholds.

All in all, we think the new protections will have very little application for bodies corporate based on all of the above.