Do You Know About Unfair Contract Terms?

Contents

Standard T&Cs are great for business.

Having solid T&Cs with your customers ensures you secure a good deal every time, including things like how and how much you get paid, a clear description of the goods or services you’re providing, and limiting your liability if anything goes wrong.

If you’re running a business, it’s always a good idea to have standard business terms and conditions in place.

But are they good for your customers? And does that matter for your business? Think about yourself as a customer for a moment:

How many times do you accept terms and conditions without reading them?

If you’re any normal person (and not a lawyer nerd like us!), it’s probably most times.

While we would advise you NOT to sign T&Cs without reading them, we get it. They can be long, boring and confusing to understand.

Plus, sometimes you feel like you have no other option.

Every time your favourite app sends you updated T&Cs, do you ever think – “What does it matter if I agree? I still need to use this app!”

The thing is, as boring and unimportant as T&Cs may seem, they are a real and legally binding contract.

So, it doesn’t matter if you read them or not. If you accept them, you are legally bound to them.

Doesn’t feel fair does it? Well, that’s why the law protects consumers against unfair contract terms. And as a business, you need to know what these are because, if you have unfair contract terms in your standard T&Cs, you may not be able to enforce them!

So it’s important to understand unfair contract terms and what they mean for your business.

What Is An Unfair Contract Term?

In Australia, we have a lot of legal protections in place for consumers. These mainly fall under the Australia Consumer Law (‘ACL’).

The ACL is designed to protect the ordinary consumer – that is, the person who doesn’t always read standard terms and conditions in great detail.

That’s why, under the ACL, certain rules apply to standard form contracts regarding unfair contract terms. In other words, it protects consumers against contracts that would place them in a disadvantaged position.

This also brings us to the question of what is considered ‘unfair’ under Australian law – but don’t worry, we’ll cover this shortly.

So, we’ve now established that unfair contract term rules apply to standard form contracts. The next question is, ‘What is a standard form contract?’.

What Is A Standard Form Contract?

A standard form contract is generally a contract that is prepared by one party and cannot be negotiated.

To put it simply, it’s a contract designed in a ‘take it or leave it’ kind of way.

Industries that typically use standard form contracts include:

Telecommunications
Finance
Domestic Building
Gyms
Car rentals
Travel
Utilities

The laws around unfair contract terms apply to standard form contracts between small businesses and individual consumers.

The laws have also been updated to better protect small businesses from unfair contract terms. This applies to standard form contracts entered into or renewed on or after 12 November 2016, in the following scenarios:

The contract is for the supply of goods or services or for the sale or grant of an interest in land.
At least one party is a small business that employs less than 20 people.
The upfront contract price is $300,000 or less OR $1 million or less if the contract is for more than 12 months.

What Makes A Contract Term ‘Unfair’?

For a contract term to be considered ‘unfair’, it must satisfy all three of the following:

Cause a significant imbalance in the rights and obligations of the parties to the contract
Be reasonably considered unnecessary to protect the interests of the party that is receiving the advantage
Cause detriment (e.g. delay or financial loss) to a small business if the term is relied upon

A term could also be unfair if it allows one party to do something that the other party cannot.

For example, a term that only allows one party (and not the other) to:

Avoid or limit their obligations under the contract
Terminate the contract
Vary the terms of the contract

Another example is a term that penalises one party for breaching or terminating the contract, but not the other party.

Overall, the laws around unfair contract terms protect consumers and small businesses in cases where they have little or no opportunity to negotiate with businesses with more negotiating power.

Are There Any Exceptions?

Yes, there are exceptions.

Certain contracts and certain terms are not covered by the unfair contracts laws.

Contracts that are not covered by these laws include:

Shipping contracts
Constitutions of companies, managed investment schemes or other kinds of bodies
Most insurance contracts
For small businesses, contracts entered into before 12 November 2016 (unless they have been varied after 12 November 2016)

Terms that are not covered by these laws include:

Terms that describe the subject matter of the contract e.g. the good or service being supplied
Terms that set out an upfront price
Terms that are required by law
Any terms that have been genuinely negotiated by the parties

In other words, terms that fall in these categories are not considered to be unfair and are permitted by law.

What Happens If You Have An Unfair Term In Your Contract?

Ultimately, it’s up to the court to decide if a contract term is unfair.

If a court finds a contract term ‘unfair’ the term will be void under section 23(1) of the ACL. This means it is not binding on the parties.

This doesn’t necessarily mean that the rest of the contract is void – it depends on how the contract is written. So, in this scenario, you can assume the rest of the contract will continue to bind the parties to the extent that it is capable of operating without that unfair term.

New Penalties For A Breach Of Unfair Contract Laws

The current state of the unfair contract terms regime means that there are no penalties for having unfair terms in your standard form contracts. Like we mentioned, the worst that could happen is the term being rendered void. Even then, the rest of the contract is still binding.

However, in late 2022, the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 was passed to introduce higher penalties for unfair contract terms. So, for the first time, businesses could potentially face heavy penalties rather than just having the term voided.

Furthermore, the changes will also apply to more small business contracts. More specifically, it will apply to small businesses who employ fewer than 100 persons or have an annual turnover of less than $10 million.

Currently, the maximum penalty for a business was $10 million. However, the new changes mean that maximum penalties for companies in breach will increase to the greater of $50 million, or 3 times the value derived from the relevant breach.

These penalties will come into effect in late 2023. As such, it’s essential that businesses prepare for these changes to avoid facing heavy penalties.

It’s highly recommended that you have a lawyer carefully review your contracts (not just standard form contracts, as the changes will extend this protection to other contracts, too!). It’s important that a lawyer assesses your contracts to ensure there are no unfair terms that could be in breach of the ACL, thereby protecting your business and consumers by the time the changes come into effect.

Our lawyers at Sprintlaw can review and redraft your contracts where necessary so that it complies with the ACL and your business can be protected in light of the upcoming changes.

Construction Contracts

If your business is in the construction industry, it’s also important that you are aware of these new changes. As we mentioned above, the protections now extend to other types of contracts as opposed to just standard form contracts.

The definition of ‘small business contract’ will be amended to include consultancy agreements, supply agreements and subcontractor agreements. Given that a majority of contracts in the construction industry are of this nature, it’s important that construction contracts are carefully reviewed and redrafted accordingly.

If you need a lawyer to review your construction contracts, our lawyers are happy to help.

How To Tell If You Have Unfair Terms In Your Contracts

The court will consider a range of factors when deciding if a contract term is unfair.

And let’s face it, the last thing you need is for your business to end up in court!

So it’s worth thinking about it before it’s too late and avoid the risk altogether. To better understand whether a term is ‘unfair’, it’s worth looking into how the courts make a conclusion on the matter.

More specifically, the courts will consider:

The extent to which the term is transparent; and
The contract as a whole

Ultimately, the easiest way to avoid having an unfair term in your contract is to get legal advice when you are first preparing the contract.

If you think you may have an unfair term in your contract, it helps to think through some of these questions:

Will my contract term cause an imbalance in my rights and obligations with the other party?
Is the contract term reasonably necessary to protect the legitimate interests of my business?
If the contract proceeded, would the term cause a detriment to the other party if they tried to enforce it?

Another important thing to consider is whether or not the term is transparent.

Are you using fine print, or complex and technical language that your customer is unlikely to understand?

If so, this could put you at risk of having an unfair contract term.

A term is considered transparent if it is in plain language, legible, clearly presented to the contracting parties, and readily available to any party affected by the term.

The less transparent a term is, the more likely it is to be considered unfair.

Unfair Contract Term Example

Imagine you were a company that provided IT services to your clients. You enter into a two year contract with a small business, and include a term that gives you the right to change your service prices at any time without having to give notice to the small business.

The termination clause of your contract also states that the small business has no right to end the contract within the two years.

These terms are likely to be considered unfair, because they create a significant imbalance between the rights of your business and the other party.

Fujifilm Case

When the courts interpret contractual terms and decide whether they are unfair, it’s worth understanding just how broadly the ACL can be applied. In this situation, it becomes even easier for your business to face heavy penalties, especially in light of the new changes.

A good example of where this has happened is the Fujifilm case.

In October 2020, the ACCC initiated proceedings against Fujifilm, alleging that their standard form contracts contained unfair contract terms. This followed a series of complaints from small businesses regarding their unfair terms.

In August 2022, the court found that 38 terms in Fujifilm’s standard form contracts with small businesses were ‘unfair’. This was contained in a range of their contracts, from software licences to rental agreements.

The court found that the following terms were unfair:

Automatic renewal term
Disproportionate termination term
Limitation of liability term
Unfair payment term
Unilateral variation term

What To Take Away…

The bottom line is that having unfair terms in your standard customer contracts is not good for your business or your customers.

There are many kinds of terms you may not even realise are unfair to the other party, especially if you’re not legally trained.

If you’re using one standard contract again and again with your customers, you want to make sure it’s legally sound. The last thing you want is to find out that your standard contract contains an unenforceable term, and you end up having to pay everyone back.

Even if your business has contracts that are not considered ‘standard form contracts’, it’s wise to have them reviewed as the new changes extend the protections of the ACL to other types of contracts, following an amended definition of ‘small business contract’.

The best thing to do it get a qualified business lawyer who is well experienced with the ACL to draft it for you.

If you need help with your standard terms and conditions – or you think your customer contracts may contain unfair terms – feel free to get in touch with us at Sprintlaw and we’d be happy to help you out!

If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Minna Boyle

Minna is the Head of People & Culture at Sprintlaw. After completing a law degree and working in a top-tier firm, Minna moved to NewLaw and now manages the people operations across Sprintlaw.

Tomoyuki Hachigo

Tomo is the co-founder of Sprintlaw and a commercial lawyer with a broad range of legal experience. Before starting Sprintlaw, he was an M&A lawyer at a top-tier law firm advising businesses of all sizes from large corporates to startups.