LEGAL UPDATE: UNFAIR CONTRACT TERMS

12 October 2017 by Nick Steinsvaag

Are your contracts fair? (And why you should care)

On 12 November 2016, the Australian Consumer Law protections against unfair contract terms that previously applied only consumers, were extended to small businesses.

The Australian Competition and Consumer Commission (ACCC) has started enforcing these provisions against business, so now is the time to consider whether your contracts comply.

Legislative background

Under the Australian Consumer Law (ACL), terms in standard form consumer contracts and small business contracts will be void if the terms are unfair.

A consumer contract is a contract for the sale of goods, services, or an interest in land, to an individual for wholly or predominantly personal, domestic or household use. 

A small business contract is a contract for the supply of goods, services, or an interest in land, where a is a business with fewer than 20 employees and the price for the sale or supply is $300,000 or less (or $1,000,000 where the contract goes for 12 months or longer).

What is a standard form contract?

Whether a contract is standard form depends on:

1. the bargaining positions of the parties;

2. whether the contract was prepared by one party before any discussion or negotiation;

3. whether a party had to “take it or leave it”;

4. whether a party was given a genuine opportunity to negotiate the terms (other than those as to price or subject matter); and

5. whether the terms take account of the characteristics of a party or the particular transaction. 

What is unfair?

A term is unfair if:

1. it causes a significant imbalance in the parties’ rights and obligations: and

2. it is not reasonably necessary to protect a party’s legitimate interests; and

3. it would cause detriment to a party if relied upon.

In determining if a term is unfair the courts will consider the contract as a whole and how clear the term is.

Examples of terms that may be unfair are:

1. allowing one party (but not the other) to avoid or limit performance of the contract or to terminate the contract;

2. penalising one party (but not the other) for a breach or termination of the contract;

3. allowing one party (but not the other) to renew or not renew the contract;

4. allowing a party to vary the contract price without letting the other party terminate;

5. allowing one party alone to determine whether the contract has been breached or to interpret its meaning;

6. allowing one party to assign the contract to the detriment of the other party without that other party’s consent.

What is the effect of a term being unfair? (Why you should care)

If a term in a standard form consumer contract or small business contract is unfair, then:

1. a party to the contract; or 

2. the ACCC,

can apply to the court to have the term declared unfair.  If the term is declared unfair, then it is void and unenforceable.

The ACCC is currently bringing the first two of these actions in the Federal Court.

What you should do:

To avoid parts of your contracts becoming void and unenforceable you should:

1. make sure that the terms are drafted as fairly as possible and are tailored to suit each transaction; and

2. be prepared to genuinely negotiate each contract and avoid applying a “take it or leave it” approach.

This legislation is relatively new.  As it becomes better known, it will be relied upon more regularly by consumers and small businesses alike.

 

Now is the time to review your contracts to identify terms that will most likely be made void by this legislation and consider alternative ways to achieve the same effect without your terms being declared void.

 

If you have any concerns that your contracts might not comply with the ACL, or someone has alleged that terms in your contracts are unfair, please contact Alex Zilkens.

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