Unfair contract terms – what are they and when do they apply?

This article was published in the Hire and Rental News Magazine, November 2022 issue, page 28

The Australian Consumer Law (ACL) aims to protect small businesses in Australia from the existence of unfair contract terms (UCT). This article will explain what an “unfair” term is, what types of small business contracts the ACL applies to, examples of unfair terms and the consequences of an unfair term in a contract. There are also proposed changes to the UCT regime which we have summarised in this article.

What is an “unfair” term?

A term in a contract is considered unfair if:

• it would cause a significant imbalance in the parties’ rights and obligations

• it is not reasonably necessary to protect the legitimate interests of the parties

• it would cause a financial or other detriment to a party if it were to be relied on.

What types of contracts are covered?

Not all contracts are impacted by the UCT regime. The ACL outlines that the UCT regime applies to ‘standard form’ contracts entered into or renewed on or after 12 November 2016 that:

• are for the supply of goods or services or the sale or of an interest in land

• where at least one of the parties is a small business (employs less than 20 people)

• the upfront price under the contract is no more than $300,000 or $1,000,000 if the contract is for more than 12 months.

Contracts that are excluded from the UCT regime are:

• constitutions, including the constitutions of companies, managed investment schemes and most superannuation funds

• contracts relating to the shipping of goods.

While this article focuses on small business contracts, if your business is also contracting with consumers (meaning that the individual is hiring the goods wholly or predominantly for personal, domestic or household use or consumption), you should be aware the UCT regime will also apply to that consumer contract.

‘Standard form’ contract

A ‘standard form’ contract is one that has been prepared by one party while the other party has little or no opportunity to negotiate the terms.

In determining whether a contract is a standard form contract, a Court may consider the following:

• whether one of the parties has all or most of the bargaining power

• whether the contract was prepared by one party before any discussion between the parties occurred relating to the transaction

• whether a party was required to either accept or reject the terms of the contract

• whether another party was given an effective opportunity to negotiate the terms of the contract

• whether the terms of the contract refers to the specific qualities of a party, or the details of the transaction.

Examples of unfair terms

It can be difficult to identify whether a term in a contract is unfair. Fortunately, the ACL provides the following examples of the kinds of terms that appear in a contract that may be unfair:

• a term that permits one party, but not another, to:

  • avoid their 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

  • vary the definition of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract

  • determine whether the contract has been breached or to interpret its meaning

  • assign the contract to the detriment of another party without that other party’s consent

• a term that penalises one party, but not another, 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

  • evidence that it can present in proceedings relating to the contract.

There are, however, terms that are exempt from the UCT regime. These are terms which:  

• set the upfront price payable under the contract

• define the product or service being supplied under the contract

• are required or permitted by law.

Ultimately, only a Court or Tribunal can determine whether a term is unfair in a contract.

Effect of having an unfair contract term

If a Court or Tribunal finds that a term is unfair, the term will be null and void. The result of a term being void is that it is no longer binding on the parties. However, the remainder of the contract will continue to bind the parties if it is capable of operating without the unfair term.

While this may not sound like a particularly serious consequence, if for example your business has relied on that term to invoice a customer or to charge additional fees, you may then be required to repay all monies received in reliance on the UCT. Additionally, should the Australian Competition and Consumer Commission look to take action, you could face further scrutiny, including financial penalties.

Proposed changes to the UCT regime

On 9 February 2022, the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (Bill) was introduced into Parliament which included proposed amendments to the UCT regime by expanding the definition of ‘small business’ to a business with less than 100 employees or an annual turnover of less than $10million. The Bill also proposed to make UCTs unlawful and give Courts the power to impose a civil penalty on businesses in breach of the UCT regime.

On 28 July 2022, the Labor Government announced that it is delivering its election commitment to make UCTs illegal, to protect small businesses and consumers. The Government confirmed that it will introduce new legislation against UCTs, being almost identical to the earlier Bill proposed by the previous federal government. The Government will introduce the new legislation in the upcoming sitting period. Watch this space!

Summary

It is important to understand if the UCT regime applies to your contracts, particularly if you operate a small business or if your customers are small businesses. Assessing whether your contract terms are unfair can be a difficult task and if in doubt, you should seek legal advice.

If you require assistance with your standard form contracts or would like any advice on the current UCT regime, please contact Gavin Stuart.  

Authors: Gavin Stuart and Nicole Marcus