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Sarah Davies

Sarah Davies

Unfair terms in contracts: Protection for consumers and small businesses

Unfair terms are void in...

Australian Consumer Law

The Australian Consumer Law provides that unfair terms in standard form consumer contracts are void (section 23). From 10 November 2016, that protection has been extended to small businesses.

This is an important development, as research by the ACCC has shown almost two thirds of small businesses claim to have experienced unfairness in contract terms and conditions they have signed. The changes to the Australian Consumer Law have extended protection to up to 2 million Australian small businesses.

In 2016, the ACCC reviewed potentially unfair contract terms in 46 standard contracts across seven industries. The review resulted in a range of businesses making changes to their standard form contracts.

The ACCC has issued media releases saying it has commenced enforcement of the new small business provisions.

Small businesses sign an average of eight standard form contracts a year…(and these contracts are now)…covered by a law preventing unfair terms in contracts that are offered on a ‘take-it or leave-it’ basis.

ACCC Deputy Chair Dr Michael Schaper

Consumer or small business contracts

The Australian Consumer Law provides that a term of a consumer contract or small business contract is void if the term is unfair and the contract is a standard form contract.

  • A consumer contract is a contract for a supply of goods or services, or a sale or grant of an interest in land, to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.
  • A small business contract is a contract for a supply of goods or services, or a sale or grant of an interest in land, entered into or amended after 12 November 2016 and:

>  when the contract is entered into, at least one party to the contract is a small business (employs less than 20 people, including casual employees employed on a regular and systematic basis), and

>  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 million.

The contract need not be in writing and can include an agreement over the phone or via the internet.

Standard form contract

The Australian Consumer Law does not define ‘standard form contract’. However, the ACCC has stated that, as a general guide, a contract which has been prepared by one party to the contract and is not subject to negotiation between the parties (ie offered on a ‘take it or leave it basis’) will be a standard form contract.

Standard form contracts are commonly used across a range of industries, including advertising, telecommunications, retail leasing, independent contracting, franchising, waste management, financial services (such as home loans, credit cards, broker agreements), utilities, vehicle hire, domestic building and gym memberships. In certain circumstances, contracts for the sale of real estate will also fall within the definition of ‘standard form contract’. This is particularly the case for ‘off the plan’ purchases from developers.

The matters that will be taken into account in deciding if it’s a standard form contract include:

  • whether one of the parties has all or most of the bargaining power
  • whether the contract was prepared by one party before any discussion relating to the transactions occurred
  • whether a party was required to accept or reject the terms of the contract in the form in which they were presented
  • whether a party was given an effective opportunity to negotiate the terms of the contract, and
  • whether the terms of the contract take into account the specific characteristics of a party or the particular transactions.

Unfair

The Australian Consumer Law provides that a consumer or small business contract will be unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract
  • it’s not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

In determining whether a term of a contract is unfair, a court must look at the contract as a whole, including any other terms that may offset the unfairness of the term. For example, additional benefits offered to the other party can counterbalance a potentially unfair term.

The court must also consider the extent to which the term is transparent, meaning it is:

  • expressed in reasonably plain language
  • legible
  • presented clearly, and
  • readily available to any party affected by the term.

Terms that may not be transparent include terms hidden in fine print or schedules, or that are phrased in legal, complex or technical language.

Examples of unfair terms

A term that permits one party (but not another party) to:

  • avoid or limit performance of the contract
  • terminate the contract
  • vary the terms of the contract
  • renew or not renew the contract
  • vary the upfront price payable under the contract without the right of another party to terminate the contract
  • unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract
  • unilaterally determine whether the contract has been breached or to interpret its meaning, or
  • assign the contract to the detriment of another party without that other party’s consent.

A term that penalises one party (but not another party) for:

  • a breach or termination of the contract.

A term that limits one party’s:

  • vicarious liability for its agents
  • right to sue another party, or
  • right to adduce certain evidence in proceedings relating to the contract.

A term that imposes:

  • the evidential burden on one party in proceedings relating to the contract.

Next steps

If you’re using standard form contracts in your business:

  1. Review your contracts – if a court or tribunal finds that a term is ‘unfair’, the term won’t be binding on the parties. It would be better to modify the term of the contract, rather than lose the benefit of the term altogether.
  2. Consider what is reasonably necessary to protect your business – if they go further than this, they risk being unfair and therefore not binding.

If you’re being asked to sign a standard form contract:

  1. Negotiate – if you think a contract term you’re being asked to agree to is unfair, ask for it to be removed or amended.
  2. Get advice – don’t sign a contract if you’re not certain of the way in which the terms operate or you can’t understand the language being used. Seek legal advice to help you decide whether or not you should sign the contract.

Please contact us if you have any questions in relation to unfair contract terms affecting your business. We can provide specialised legal advice in relation to contract terms and dispute resolution.


Sarah Davies
Director
Sarah Davies Legal

Accredited Specialist – Commercial Litigation

This article is produced as general information in summary for clients and should not be relied upon as a substitute for detailed legal advice or as a basis for formulating business or other decisions. Formal legal advice should be sought in relation to particular matters. Sarah Davies Legal Pty Ltd asserts copyright over the contents of this document.

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