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Are your business contracts fair? How to eliminate unfair contract terms

Commercial Law

It’s 10 years since provisions of the Australian Consumer Law came into effect, declaring unfair terms in standard form consumer contracts void.  It’s almost 4 years since the provisions were extended to cover unfair terms in small business contracts as well.

Examples of cases where contract terms were declared void because of unfairness include:

  • A hamper supplier whose terms allowed it to continue taking payments by direct debit after its customer’s order was fully paid for; and
  • A serviced office provider whose contract (a) renewed automatically unless its customer ‘opted out’ and (b) allowed the provider to keep the customer’s security deposit if the customer did not request its return.

Unfair terms in contracts can prove expensive, not only because they may be declared void but also because of the cost of the associated litigation and the damage to a business’ reputation.  So, what are unfair terms and how can you be sure that your contracts do not contain them?

When do the unfair contract terms provisions of the Australian Consumer Law apply?

A term of a consumer contract or a small business contract is void if:

  • the term is unfair; and
  • the contract is a standard form contract. (The rest of the contract continues to bind the parties if it is capable of operating without the unfair term.)

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 who acquires the goods, services or interest for personal, domestic or household use or consumption.

A contract is a small business contract if:

  • the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
  • at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
  • either of the following applies:
    • 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.

What isunfair’?

A term of a consumer contract or small business contract is “unfair” if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term (the onus is on that party to prove that it is reasonably necessary); 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 take into account the extent to which the term is transparent.  A term is transparent if the term is:

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

Examples of unfair terms

Examples of the type of terms that may be unfair are terms that permit:

  • one party (but not another party) to avoid or limit performance of the contract;
  • one party (but not another party) to terminate the contract;
  • one party (but not another party) to vary the terms of the contract;
  • one party (but not another party) to renew or not renew the contract;
  • one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
  • one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract; and
  • one party unilaterally to determine whether the contract has been breached or to interpret its meaning.

What is a standard form contract?

If a party to litigation alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party proves otherwise.

Factors that determine whether a contract is a standard form contract include the following:

  • whether one of the parties has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • whether another 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 another party or the particular transaction.

How can you be sure that your contracts are fair?

To work out whether your contract terms are fair or may be declared void for unfairness, one needs to analyse each term objectively, having regard to all the surrounding circumstances and taking into account the factors outlined above (amongst others).  Atkinson Vinden Lawyers has many years of experience of drafting and reviewing contracts and can advise you on changes that may be necessary to ensure that your contract terms are fully compliant.  Please contact Special Counsel Michael Tyler on (02) 9411 4466 if you would like a review or amendment of your business terms.