Unfair contract terms – how could they affect you?
On 2 November 2016, a new law, Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 (Cth), came into effect. The aim was to protect small businesses from unfair terms in business-to-business standard form contracts.
This law applies to standard form contracts that are either entered into, varied on or after, or renewed on or after 12 November 2016, where:
- the contract is for the supply of goods or services or grant of an interest in land;
- at least one of the parties is a small business (employs less than 20 people, including casual employees employed on a regular and systematic basis);
- the upfront price payable under the contract is no more than $300,000 or $1 million if the contract is contract is for more than 12 months.
A standard form contract is one that has been prepared by one party to the contract and where the other party has little or no prospect to negotiate the contract terms.
Further, such kind of contract is generally offered on a “take it or leave it” basis.
What are Unfair Contract Terms?
In determining whether a clause of the contract is unfair, the Courts will generally apply a three-limbed test for unfairness.
This test states that the term would be unfair if it:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party if it was to be applied or relied on.
The courts will determine that a term in the agreement is unfair only if it is proved on the balance of probabilities that all the three factors of the unfairness test exist.
What factors would a court will take into account to determine whether is term is fair or not?
Section 24 of Schedule 2 of the Competition and Consumer Act 2010 (Cth)
In determining whether a term of a contract is unfair, a court may consider number of factors that it thinks is relevant. However, according to the legislation, the court must take into account the following factors during determination:
- the extent to which the term is transparent; and
- the contract as a whole.
A term is transparent if the term is:
- expressed in reasonably plain language;
- presented clearly; and
- readily available to any party affected by the term.
Specifally under the Australian Consumer Law, “termination for convenience” clauses or “a term that permits, or has the effect of permitted on party (but not another party) to terminate the contract” may be considered unfair.
What contracts are not covered by the Unfair Terms law?
Contracts for certain goods or services that this law does not apply to includes:
- most insurance contracts, such as car insurance, home and contents insurance and consumer credit insurance contracts. Some insurance contracts, including private health insurance are covered
- constitutions, including the constitutions of many superannuation funds, companies, and managed investment schemes
- contracts for the shipping of goods.
Conclusion – Does the term cause a significant imbalance between your rights and obligations and those of the business
In order to answer the question above, you need to ask include whether the term is reasonably necessary to protect the legitimate interests of the business? Would the term cause you detriment (financial or non-financial) if the business tried to enforce it? How transparent is the term? See more on the ACCC site.
If the answer is yes, you might want to seek legal advice.
To get advice about unfair contract terms call Sharon Givoni Consulting.