What are Unfair Contract Terms?

What are Unfair Terms? Have you recently signed an unfair contract as a small business operator?

If so, your small business may be protected under Australian Consumer Law (“ACL”).

The ACL protects consumers from unfair terms in a contract. On 12 November 2016, the ACL was amended to extend the protection from unfair terms to small businesses.[1]

Is my small business protected?

To be protected from unfair terms as a small business, the contract must be a standard form contract entered into or renewed on or after 12 November 2016.[2]

While determining whether a contract is a “standard form contract” is a legal test, the Australian Competition and Consumer Commission has defined a standard form contract, in general terms, as:[3]

“A standard form contract is a contract prepared by one party where the other party has little opportunity to negotiate the terms.”

Furthermore, if the contract is a small business contract, the following criteria applies:[4]

• at the time the contract is entered into, at least one party to the contract must be a business that employs fewer than 20 persons, and
• the upfront price payable under the contract must be less than $300,000 (or $1,000,000 if the contract is longer than 12 months), and
• the contract is for the supply of goods or services or the sale or grant of an interest in land.

When is a contract term, ‘unfair’?

The ACL outlines a number of examples of terms that may considered ‘unfair’, including:[5]

• a term that has the effect of one party (but not the other party) to avoid or limit their performance under the contract
• a term that has the effect one party (but not the other) to terminate the contract
• a term that has the effect of one party to penalise (but not the other) for a breach or termination of the contract
• terms that has the effect of one party (but not the other) to vary the terms of the contract.

The examples are intended to show the kinds of terms that may be considered ‘unfair’. However, to determine whether a term is unfair is a legal question including many factors such as:[6]

• whether there is significant imbalance between the rights and obligations between the parties?
• whether the terms are reasonably necessary to protect the legitimate interests of the parties?
• whether the terms will cause detriment to the above term if relied on?

What are the exceptions?

While the ACL protections relating to unfair terms is intended to apply to standard form contracts, there are several exceptions in which the protections may not apply, including:[7]

• contract of marine salvage or towage;
• charterparty of a ship;
• contract for the carriage of goods by ship;
• constitutions of companies, managed investment schemes or other kinds of bodies; and
• a small business contract to which a prescribed law of the Commonwealth, a State or a Territory applies

Who can assess fairness?

A court or tribunal can determine whether a term is unfair or fair. If a court or tribunal finds that a term is ‘unfair’, then the term will be considered ‘void’.[8] However, the remainder of the contract will continue to bind the parties if it can operate without the ‘unfair’ term.[9]

If you have concerns that you may have entered into an unfair contract or feel like you are eligible for protections under the law, then you should consider seeking professional legal advice.

How can DSA Law help?

If you have a commercial law issue and believe you could benefit expert legal assistance, please Contact Us or one of our Commercial Lawyers at DSA Law on (03) 8595 9580.

[1] Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth), s 2

[2] Ibid, s 3

[3] Competition and Consumer Act (Cth) sch 2 (‘Australian Consumer Law’), s 27; See generally, Australian Competition and Consumer Commission, Unfair contract terms <https://www.accc.gov.au/business/business-rights-protections/unfair-contract-terms>

[4] Ibid s 23(4)

[5] Ibid s 25

[6] Ibid s 24

[7] Ibid s 28

[8] Ibid s 23(1)

[9] Ibid s 23(2)