From time to time small businesses can be presented with lengthy contracts, but often they do not have the time or expertise to critically analyse them.
This month’s article discusses the risks with some of those contracts you are given to sign and ways you can be protected.
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Is That Contract Fair?
We have more and more of our clients being presented with lengthier contracts for work that are difficult to follow and understand. They are desperate for the income these contracts can bring to them but are in danger of unknowingly accepting a “hold harmless agreement” or an indemnity clause that is not going to be automatically covered by their own insurance policies.
The terminology used and the length of these contracts could be accused of being designed to potentially confuse or mislead. As Insurance Brokers, we automatically recommend legal advice is sought, however this is not always affordable or there are time constraints.
So what do mean by Hold Harmless Agreements or indemnity clauses? It is a way of transferring risk or responsibility onto another person. This is not always considered fair. Click here for more details.
Some of the insurance policies we obtain provide free contract reviews as a bonus extra. Some other policies such as in the Construction Risk area, agree to automatically assume hold harmless agreements. There is also a service available to our clients called “Gold Seal” which provide this review for a reasonable fee. Apart from this, there are lawyers who can also assist in such contracts.
There were plans back in 2009 for the Federal Government to bring in laws to protect small business from such unfair contract terms, but they faced strong opposition with the proposal being defeated. However these contracts have been getting even more onerous.
The Commonwealth Treasury has released a consultation paper proposing to extend to small businesses the same protection from unfair contract terms as have been given to consumers. Page one states:
'small businesses ... are commonly presented with standard form contracts and, like consumers, can lack the time and legal or technical expertise to critically analyse these contracts, and the power to negotiate.'
Your views are being sought on the extent of this problem, and options to address it. Submissions are due by 1 August 2014. Please click here if you would like to contribute.
The Australian Consumer Law as it currently applies to consumers enables a court to declare a term of a standard form contract void if it is considered to be 'unfair'. A term is considered to be 'unfair' if it:
causes a significant imbalance in the parties' rights and obligations under the contract
is not reasonably necessary to protect the legitimate interests of the party advantaged by the term
it would cause detriment to a party, if it were to be applied or relied on.
In determining whether a term is unfair the court must consider the extent to which the term is transparent and take into account the contract as a whole.
The paper makes clear that it is the government's policy and preferred option is to extend the existing unfair contract regime to small business contracts, as it is the inequality of bargaining power between counterparties that is at the heart of the perceived problem.
However, they may look at other options if overwhelmingly preferred by small business. The consultation paper seeks input also as to whether the rules should apply only to large businesses offering standard contracts to small businesses, or to all businesses, (including small ones).
Some businesses will oppose unfair contract term protection if it is extended to protect small business (however it is defined). These will be those businesses that provide such contracts to those they require services from. This will only be because they will need to go through their standard form contracts to identify any high risk terms which could be considered 'unfair' because this will create potential implications for any contractual arrangements they have made.
From an Insurance Broker’s point of view, having an insurance claim denied because a particular “Hold Harmless” clause was not declared and accepted by the insurer, simply because a client could not readily identify such clauses, or could not afford to pay for this legal advice, means we would prefer the existing consumer laws on unfair contract terms to be extended to include small business.
Man About the House
The husband had just finished reading a new book entitled, "You Can Be the Man Of Your House."
He stormed into the kitchen and announced to his wife, "From now on, you need to know that I am the man of this house and my word is Law."
"You will prepare me a gourmet meal tonight, and when I'm finished eating my meal, you will serve me a sumptuous dessert."
"After dinner you are going to draw me a bath so I can relax. You will wash my back, and towel me dry, and bring me my robe.
Then you will massage my feet and hands. And tomorrow, guess who's going to dress me, and comb my hair?"
The wife replied, "The funeral director would be my first guess."