Unfair Contract Terms: What You Should Know

When engaging with customers, it is common for businesses to use a contract from a template. Standard form contracts are an efficient and cost-effective alternative to drafting contracts. Whilst businesses prefer to use these, they nevertheless carry risks especially where there is an imbalance in bargaining power.

These issues surrounding onerous contract terms have resulted in the Australian Consumer Law (“ACL”) and the Australian Securities and Investments Commission Act 2001 (“ASIC Act”) to provide provisions with respect to unfair contract terms. The ACL and ASIC Act are similar in the protections they offer with the ASIC Act applying to financial products and services.

What types of contracts are covered?

Under section 23(3) of the ACL, a consumer contract will fall within the scope of the protection where it is a contract for:

1. The supply of goods or services; or
2. A sale or grant of an interest in land.

Small business contracts are covered by section 23(4) of the ACL if:

1. The contract is a standard form contract for the supply of goods or services or the sale or grant for an interest in land; and
2. At least one of the parties is a “small business”: meaning that at the time the contract was entered into, at least one party to the contract is a business that employs less than 20 people; and
3. Either the upfront price payable under the contract does not exceed $300,000 or the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000. This can include contingent payments and interest payable.

Under these provisions of the ACL, there is a presumption that the contract is a standard form contract unless proven in the contrary. In addition, the definition of a small business includes a not-for-profit business. Therefore, it is possible for a subsidiary of a large company to fall within this protection if it meets the requirements of a small business.

Under the ASIC Act, the unfair contract terms law applies to standard form consumer contracts. For example, contracts for home loans, credit cards and client or broker agreements.

If you find yourself in a situation where there is a potential unfair contract term, you may fall under the ACL or the ASIC Act or even both.

How is an unfair contract term determined?

First, it should be noted that unfair contract terms can only be determined by a court or tribunal. This applies under both the ACL and the ASIC Act.

Under section 24(1) of the ACL, a term is unfair if it:

1. causes a significant imbalance in the parties rights and obligations arising under the contract;
2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. it would cause a financial or other detriment to a party if it were to be applied or relied on.

Some examples of unfair terms include those that enable one party (but not the other) to avoid or limit their obligations under the contract, terms that enable one party (but not the other) to terminate the contract and terms that penalise one party (but not the other) for breaching or terminating the contract.

Under section 24(2) and (3) of the ACL, when the court is determining whether a term is unfair, it has the discretion to consider any matter it deems relevant but it must assess the fairness of a particular term in light of the contract as a whole and the transparency of the term.

A term is considered transparent if it is legible, expressed in reasonably plain language, presented clearly and is readily available to any party affected by the term. Terms that may not be transparent include terms that are hidden in the fine print or schedules or terms that are phrased in legal, complex or technical language.

However, it is important to note that a term that is transparent could still be found to be unfair if it falls under the criteria of an unfair term.

The ASIC Act has similar criteria to the ACL for the classification of an unfair term and requires a holistic view of the contract when assessing whether a term is unfair.

Are there any exclusions?

Certain types of contracts are excluded. Under the ACL, contracts entered into before 12 November 2016 (unless renewed on or after this date), shipping contracts, constitutions (such as companies, managed investment schemes and superannuation funds), certain insurance contracts (for example car insurance, home and contents insurance but not private health insurance) and contracts in sectors exempted by the Minister (none at present) are excluded from these protections.

Under the ASIC Act, insurance contracts that are regulated under the Insurance Contracts Act 1984 (Cth) and the constitutions of companies, managed investment schemes or other kinds of bodies are exempt.

Certain types of terms are excluded. Under both the ACL and ASIC Act, terms that :  

1. define the main subject matter of the contract;
2. terms that set the upfront price payable; and
3. terms that are required or expressly permitted by a law of the Commonwealth or a state or territory (such as those permitted under the Franchising Code) are excluded.

What are the consequences of unfair contract terms?

Under the ACL, section 23(1) provides that if a term is found to be unfair, it can be declared void and no longer binding on the parties. However, section 23(2) provides that the rest of the contract will continue to operate. The ACL does not require fines or penalties to be imposed on the contravening party, but there are a number of remedies that may be made including an injunction to stop the contravening party, compensation orders and damages.

Under the ASIC Act, if a court finds that a term in a contract is unfair, the term is deemed void and the rest of the contract is binding on the parties. A court can make a range of orders including :

1. declaring all or part of the contract to be void;
2. varying a contract;
3. refusing to enforce some or all of the terms of a contract;
4. directing a party to refund money or return property to the consumer affected; and
5. directing a party to provide services to the consumer affected at the party’s expense.

The remedies available for contravening the ASIC Act in this way include :  

1. an injunction;
2. an order to provide redress to the consumer affected; and
3. any other orders the court thinks appropriate.

How can you avoid breaching these laws?

Businesses are advised to identify the consideration payable under standard form contracts and what forms the upfront price payable. They should review their standard form contracts and consider amending or removing any terms that may be considered unfair or borderline clauses. When doing this, you should ask these questions:

1. Does the term cause a significant imbalance between your rights and obligations and those of the business?
2. Is the term reasonably necessary to protect the legitimate interests of the business?
3. Would the term cause you detriment (financial or other) if the business tried to enforce it?
4. How transparent is the term?

Businesses should establish which contracts are to be made with businesses employing less than 20 people. They should consider adding a note advising the customer that the contract is a standard form contract that can be negotiated. Alternatively, it is advisable that businesses consider drafting separate contracts for agreements with small businesses.

Having a sound understanding of what is acceptable when contracting with small businesses will ensure that you can identify any potential breaches before they occur.

Interested in chatting with us?

In need of commercial law support? Biztech Lawyers is a multi-award-winning law firm, known for fuelling and protecting tech innovation worldwide. Get in touch now to see how we can help.