Understanding Unfair Contract Terms

Signing a contract as a consumer or small business can be quite daunting, given the length and complexity of legal documents. Not to mention the fact that contract documents are typically prepared by lawyers and usually full of industry specific jargon and legalese, which can go over the head of even the most knowledgeable and well-informed consumer. As a result of this power imbalance, and in a bid to level the playing field for consumers and small businesses alike, the Competition and Consumer Act 2010 was updated to introduce the new unfair contract term regime. In this article, our commercial law team will look at the application of the unfair contract term regime, the changes to the regime and how this reform will affect contracts moving forward.

BACKGROUND – UNFAIR CONTRACT TERMS

In Australia the Australian Consumer Law (‘ACL’) regulates fair trading by setting out the rights of consumers and small businesses as well as the obligations of those who supply goods and services. Amongst a number of other things, the ACL prohibits a party to a contract from proposing, using or relying on unfair contract terms.

However, this prohibition only applies in limited circumstances and to certain types of contracts and groups as narrowly defined under the ACL. Accordingly, to receive the benefit of the unfair contract provisions (and relevant protections), it must be shown that:

1. the contract is a ‘Small Business Contract’ or ‘Consumer Contract’;
2. the contract is a ‘Standard Form Contract’; and
3. the term in question is ‘unfair’ within the meaning of the ACL.

Each of these elements are is discussed below.

SMALL BUSINESS AND CONSUMER CONTRACT

Under the ACL, a Consumer Contract is a contract where one of the parties is a consumer and is an individual who is acquiring goods or services wholly or predominantly for personal, domestic or household use or consumption.

Conversely, a contract is a Small Business Contract if all the following apply:

• the contract if for the supply of goods or services;
• at the time of the contract, at least one of the parties is a business that has less than 20 employees, excluding casual employees not employed on a regular basis (i.e. a small business); and
• the contract is for less than $300,000 or $1,000,000 for contracts greater than 12 months.

STANDARD FORM CONTRACT

A Standard Form Contract is essentially a contract that is wholly prepared by one party and offered on a ‘take it or leave it basis’. To determine whether a contract is a Standard Form Contract, the following factors are typically considered by the courts:

• whether the party that prepared the contract had all or most of the bargaining power;
• whether the contract was prepared without or before any discussion between the parties about the transaction;
• whether the other party’s options were limited to only either accept or reject the terms of the contract as presented; and
• whether the terms of the contract reflect any specific characteristics of the other party or the particular transaction.

UNFAIRNESS

Finally, and perhaps most importantly, it must be shown that a term or terms contained in a contract are ‘unfair’ within the meaning of the ACL for the unfair contract term regime to apply. Under the ACL, a term will be unfair if it:

• would cause a significant imbalance between the rights of each party;
• is not reasonably required to protect the legitimate interests of the party advantaged by it; and
• would cause or lead to detriment (financial or otherwise) to a party if relied upon.

The ACL also includes several examples of such terms. While there is no one definitive example of an unfair contract term, the following may be considered unfair depending on the circumstances: terms that permit automatic renewal of a contract, terms that allow unilateral price increases, and terms that impose one-sided termination rights.

CHANGES TO SCOPE

As a result of the changes to the ACL, the scope of the unfair contract term regime has been somewhat expanded, and a Small Business Contract will now include businesses:

• who employ 100 or less employees; or
• which make less than $10 Million in annual turnover.

The contract value threshold (previously between $300,000 and $1,000,000) has also been removed.

Further, the definition of a Standard Form Contract has been updated to clarify that minor negotiated changes to a contract do not exclude it from being a standard form contract.

NEW PENALTIES

In addition to the changes to the scope of the ACL, tougher penalties have also been introduced for parties seeking to use or rely on unfair contract terms.

The maximum penalty for a company is now the greater of:

• $50 million;
• three times the value of the “reasonably attributable” benefit obtained from the conduct, if ascertainable; or
• if a court cannot determine the benefit, 30% of adjusted turnover during the breach period.

The maximum penalty for an individual was also increased to $2.5 million.

RAMSDEN LAWYERS – HOW WE CAN HELP 

The changes outlined in this article will apply to all contracts made or renewed (or a term that is varied or added to a contract) after 9 November 2023. Accordingly, the ACCC has actively encouraged businesses to review their contracts and remove any potentially unfair terms or risk substantial penalties and regulatory scrutiny.

If you seeking legal advice or assistance with your transaction or consider your contract to contain unfair contract terms, Ramsden Lawyers can assist you. We are happy to arrange an obligation-free initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances.

The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice. Specific advice should be sought about your circumstances.