What are unfair contract terms

Since 12 November 2016, any terms that are ‘unfair’ in new or renewed contracts (i.e. contracts renewed after 12 November 2016) could be deemed void and unenforceable.

What sort of contracts are caught by the unfair contracts regime?

The following small business contracts are covered by the unfair contracts legislation:

  1. contracts for the supply of goods, services, financial services or financial products or a sale or grant of an interest in land
  2. that are entered into or renewed on or after 12 November 2016 (including variations and automatic or periodic rollovers)
  3. where at least one of the parties is a business that employs less than 20 people
  4. where the contract is considered to be a ‘standard form contract’ i.e. it has been prepared by one party to the contract and is not subject to negotiation between the parties (offered on a ‘take it or leave it’ basis), and
  5. the upfront price payable under the contract does not exceed $300,000 (or $1 million if the contract is for more than 12 months).

If you contract satisfies all of the above then the contract must not include terms that are unfair.

What kind of terms will be considered ‘unfair’?

To be ‘unfair’ under the Australian Consumer Law (ACL) a term must:

  1. cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  2. not be reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term, and
  3. cause detriment (financial or otherwise) to a party if the clause in question was applied or relied on.

A contract term must satisfy all three elements to be deemed unfair.

What types of clauses are unfair?

The most commonly-occurring problems are contract terms that allowed the party that drafted the contract:

  1. To vary a term if they feel like (where the term they are looking to vary could have a significant bearing on the contractual arrangement, or which could cause detriment if varied). We have seen this in waste management contracts where the waste management service provider gives themselves the ability to increase costs payable but the recipient of the services, say a small suburban supermarket, is not able to terminate the contract and has to accept the price increases. In those circumstances the ACCC recommended removing these terms or balancing them with a reasonable notice period and a right to end the agreement if the small business does not agree to the variation.
  2. Broad and unreasonable powers to protect themselves against loss or damage at the expense of the small business by imposing broad indemnities or excessive limitations of liabilities. The ACCC considers that these terms should only be used to the extent reasonably necessary to protect the larger business’s legitimate interests, and
  3. An unreasonable ability to cancel or end an agreement as it suits them. The fair position will depend on the circumstances but the ACCC recommends that contract providers should generally give small businesses the right to rectify a breach, increase the length of an existing rectification period, and limit grounds for termination to those that are reasonable.

Other clauses that could be unfair:

  • In a number of specific industries the ACCC found that automatic rollover clauses, while not necessarily unfair, could be reason for concern. To ensure they are enforceable under the new regime, the ACCC recommended ensuring small businesses receive reasonable notice that the contract is about to renew and the ability to exit the renewed contract without penalty.
  • Early termination charges in telecommunications contracts are also predicted to be deemed unfair, unless they reflect a genuine estimate of the carrier’s losses if a customer terminates their contract.

If you use standard contracts and you deal with small businesses then you should ensure that your standard contracts do no breach the unfair contracts legislation.

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