Unfair Contract Terms – Snapshot Guide

There are laws protecting consumers from unfair terms in circumstances where they have little or no opportunity to negotiate with businesses such as with standard form contracts. The Australian Consumer Law invalidates unfair contract terms in standard contracts with consumers.

Some businesses provide consumers with standard form contracts to improve efficiency; however, these forms must take account of an individual’s rights when businesses are preparing the contract.

How can you tell if a contract is unfair?

Conducting an unfair terms review of a contract is sometimes a difficult task. The fairness of a term must be considered in the context of the contract as a whole.  Importantly, the final decision whether a term is unfair can only be made by a court. The following criteria must be satisfied in order for a term in a contract to be found unfair:

  1. The term causes significant imbalance in the parties rights and obligations;
  2. The term is not reasonably necessary to protect the legitimate interests of the benefited party; and
  3. The term causes detriment (financial or otherwise) to the other party.

It is important to note that some terms are exempt from being declared unfair including terms that are required by law, terms that define the main subject matter of the contract or terms that set the price.

Approaches to address unfair terms

If you have identified an unfair term in the contract which is likely to be found unfair, there are a number of actions to consider:

  • Amend terms to make them mutual or delete the term
  • Insert balancing terms
  • Narrow broadly drafted terms
  • Make terms more reasonable
  • Be consistent
  • Draft clearly in plain English, use good structure and minimise use of schedules
  • Clearly, disclose the amount charged or the basis on which a fee was calculated
  • Give the party a written copy of the whole term
  • Amend drafting to be more explanatory
  • Draft or redraft the term with severability in mind
  • Give an opportunity to negotiate or dispute resolution process
  • Consider allowing the other party to opt out of the term.
  • Draw attention to the term (use colour) and request acknowledgement
  • Keep records of the reasons for including important terms

Extension of unfair contract terms regime to small businesses

Legislation has been passed by the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 to extend the unfair contract term protections to small businesses; this will take effect on 12 November 2016.

The new law allows unfair contract terms in a standard form consumer contract and a standard form small business contract to be declared void. The contract will only continue to bind the parties if it can operate without the unfair term.

What contracts are ‘small business contracts’?

Contracts affected are those where:

  • If at the time it is entered into at least one party is a small business (employs less than 20 people);
  • The upfront price payable under the contract is;

= $300,000 or less; or

= $,1000,000 or less, if the contract is for more than 12 months; and

  • Subject to limited exemptions, the contract is a standard form contract (that is a pre-prepared contract that is not generally negotiated) for the supply of goods or services or sale or grant of an interest in land.

What does this mean for businesses?

Businesses should ensure they review and update their standard form contracts to comply with the new laws by 12 November 2016.

Importantly, the new regime will apply to existing contracts if they are renewed after the effective date or will apply to a particular term of the contract where that term is varied after the effective date.

What terms will be subject to most scrutiny?

Terms which enable only one party to;

  • Avoid or limit performance of the contract or limit liability;
  • Vary or terminate the contract;
  • Renew or not renew the contract;
  • Vary the price of characteristics of what is to be supplied (without the other party being able to terminate the contract);
  • Assign the contract without consent ;
  • Impose an evidential burden on the other party in proceedings or limit the other party’s rights to sue or adduce evidence ;
  • Determine if a breach has occurred or impose a penalty for a breach or termination.

These terms will come under close scrutiny, and in order to rely on such provisions, there will need to be a legitimate business need for the term. Making the provisions clear and transparent will also assist.

Some examples of unfair terms include automatic rollovers, one-sided price increases, one-sided change to the amount of data or calls and compulsory acquisition of franchise at less than the market rate.

What should businesses do?

For a business, starting the review of business contracts early is advisable to ensure that any changes can be socialised and legal advice can be obtained. The following are some practical steps which businesses can consider taking in response to the new laws:

  • Review contracts that might be used in transactions involving businesses with less than 20 employees.
  • Review new contracts and existing contracts which you intend to renew or vary.
  • Consider creating a separate set of contracts for big businesses.
  • Consider structuring the price to exceed the financial threshold.
  • Consider asking the other party how many people it employs.
  • Calculate the upfront price.
  • Check whether your business employees fewer than 20 persons.
  • If your business has less than 20 employees, use the new regime as a bargaining tool.

Are you unsure whether your business contract complies with the new legislation? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website.