This rundown of essential contractual terms might just surprise you
If you’re an Australian business owner or decision-maker, it’s likely that you use a standard type contract for supplying goods and services.
Now, your standard contract is probably subject to the Unfair Contracts Regime—legislation that falls under Australian Consumer Law.
Based on this notion, there are unfair terms or agreements within contracts that you should (or really must) avoid. But, what are they?
Well, let’s find out.
Unfair contract terms: what are they and what do they look like?
First of all, you need to understand if you’re likely to get caught out by the Unfair Contracts Regime.
If one of the parties to your transaction is a small business, for instance, a company that employs 20 people or fewer, and the upfront price payable within your agreement is no more than $300,000 or no more than a million, (or if the contract is set for a term of 12 months or more), it’s likely that you are subject to the Unfair Contracts Regime. So beware.
What kind of contract terms are considered unfair?
If there is a unilateral variation clause in the contract, one that gives one party the right to vary the terms of an agreement without notice and prior correspondence, or without the other party being able to reject or negotiate the variation, this is considered an unfair contract term.
Next we look at the automatic renewal clause. This is a case where your client or customer must give notice to cancel the contract within a specific timeframe, and that you, as the provider of goods or services, aren’t required to provide any notice concerning the imminent rollover of the term. This is an unfair contract term if ever I saw one.
Now, bear in mind, it is possible to set an unlimited contract term—one that renews automatically—if you have a termination for convenience clause in place. In this instance, the contract runs ad infinitum (or forever) one of the parties requests termination. This clause is deemed to be fair as unlimited contract terms are generally seen as indefinitely rather than infinitely set in stone.
So, if you can terminate for convenience, then automatic renewal clauses are fair. But, if there is an automatic renewal clause where your client or customer has to fulfil certain requests by certain dates, and if they fail to, the clause rolls over, this is considered unfair.
Extraneous documents. If your contract imposes obligations from separate contracts that you’re under no obligation to provide, guess what? That is considered an unfair contract term. This makes sense because if a party is signing a contract, they should be able to access every term and condition as well all obligations, before they sign the contract. And, if those obligations are filed in separate documents, they will not be bound by them.
Some clauses that limit liability are classed as unfair. If a contract limits your liability towards a client or customer, or commands that your customer or client indemnifies you,(this includes times when you or your agents have either caused or contributed to a loss), you’ve stepped into unfair contract term territory. Basically, if you’ve caused or contributed to a loss, you shouldn’t have the power to demand indemnity from your customer or client. Its that simple.
Next, we look at disproportional termination terms. If a contract permits to suspend or terminate your terms for minor breaches, yet the other party doesn’t have equal rights to do so, this means the termination clause is disproportionately skewed towards your interests as the contract creator. This is unfair and will make your contract null & void.
Note: The simple way to avoid a situation like this is to create a balanced termination clause. A clause of this nature means if you can terminate by giving 30 days notice, for example, your client should have mirroring rights.
Okay, let’s move right along.
The next one is termination payments. Here, if the contract states that if you terminate the contract, your customer or client is subject to a termination fee (set by and payable to you), at a rate disproprtiate rate to the damage or loss (reason for termination), that is, yes, unfair.
Okay, next one. Some contract clauses about ‘what has happened’. So, what happens when the contract ends is found unreasonable? Well, if you are in the goods provision game, for example, your contract might outline that following the minimum term, your customer must either retain the goods or pay you the shortfall between the residual value and the market value.
But, in this case, you’re the one that sets the residual or market value and the title as well as the equipment does not pass to the customer at any time. And, well, that’s just plain unfair.
Our next unfair contract term is referred to as an irrevocable offer. This is a clause that says on signing the contract, your customer or client makes an irrevocable offer to you, one that you’re not bound until your customer satisfies a form of acceptance or conditional acceptance criteria. If you set this kind of term and offer the other party nothing in return, you will find yourself in contractual hot water.
Okay, our next one is non-reciprocal provisions. This is a pretty standard term: if the contract isn’t balanced (basically, if the obligations placed on your customer or client aren’t equal to the obligations placed on you), it’s likely your contract will be deemed unfair and not worth the paper it’s printed on.
Finally, we reach unfair payment terms. If your contract details payment obligations imposed whether you fulfill your end of the bargain (provide promised goods or services) or not, this is considered unfair.
So, if you’re a business and you use a standard contract for providing goods or services (which, to be fair, you should), considering whether your terms, clauses, and conditions are fair is essential.
If you can do that, you will not be in breach of Australian Consumer Law and you will avoid any costly errors or issues.
I hope you found this guide to unfair contract terms and clauses. If you have any more contract-based curiosities, we run a charity called Ask a Lawyer, where you can ask a question and a legal professional will get back to you with a detailed answer.