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What Are Unfair Contract Terms?

Unfair contract terms that are contained in consumer contracts go against the Australian Consumer Law. Because of this, unfair contract terms are 'void', meaning the contract is read as if that unfair term does not exist.

We're going to take a detailed look at unfair contract terms in Australia and find out what they are, why they're a problem and what you can do to avoid them.

Author: Farrah Motley, an Australian contract lawyer.

How does the law define unfair contract terms?

The Australian Consumer Law, which is found in Schedule 2 of the Competition and Consumer Act 2010 (Cth), sets out the law in Australia relating to unfair contract terms.

Section 23 starts off by saying that a clause in a 'consumer contract' or a 'small business contract' is void if the clause is unfair and the contract is a 'standard form contract'.

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

If a contract is varied on or after 12 November 2016, the law applies to the varied terms.

As you can see, there are a lot of elements to the definition of an unfair contract term. Let's take a look at what each of these words and phrases mean.

Consumer contract

A consumer contract is one where the customer is not buying the goods or services for commercial purposes (for instance, to resell the goods they are buying). If a contract is for goods or services that are being bought are ordinarily used for personal, domestic or household purposes, the contract is a 'consumer contract'.

A consumer contract can also include buying or being given an interest in land.

Small business contract

A small business contract is one where:

  • at least one party is a small business because it employs less than 20 people; and

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

The concept of 'unfair'

To be ‘unfair’, a term must:

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

  • not be reasonably necessary to protect the legitimate interests of the party advantaged by the term, and

  • cause financial or other detriment (such as delay) to a small business if it were relied on.

Ultimately, only a court (not the ACCC) can decide whether a term is unfair.

In deciding whether a term is unfair, a court must consider how transparent the term is, as well as the overall rights and obligations of each party under the contract. The court may also consider other relevant matters.

A term is transparent if it is:

  • expressed in reasonably plain language

  • legible

  • presented clearly

  • readily available to any party affected by the term

Terms that may not be transparent include terms hidden in fine print or schedules, or that are phrased in legal, complex or technical language. However, a transparent term can still be an unfair term.

What is not an unfair contract term?

Excluded contracts

  • Contracts entered into before 12 November 2016 (unless renewed on or after this date)

  • Shipping contracts

  • Constitutions of companies, managed investment schemes or other kinds of bodies

  • Contracts in sectors exempted by the Minister – no sectors are currently exempt.

Excluded terms

  • Terms that define the main subject matter of the contract

  • Terms that set the upfront price payable

  • Terms that are required or expressly permitted by a law of the Commonwealth, or a state or a territory (e.g. permitted under the Franchising Code or another prescribed industry code).

What is a standard form contract?

For a contract term to meet the legal definition of an unfair contract term, it must be included in a standard form contract.

A standard form contract is one that:

  • has been prepared by one party to the contract; and

  • the other party has little or no opportunity to negotiate the terms (the contract is offered on a 'take it or leave it' basis)

What happens if a term is 'unfair'?

If a court or tribunal finds that a term is ‘unfair’, the term will be void – this means it is not binding on the parties. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

Contract Law
Contract Law

What are some examples of unfair contract terms?

The law sets out examples of terms that may be unfair, including:

  • terms that enable one party (but not another) to avoid or limit their obligations under the contract

  • terms that enable one party (but not another) to terminate the contract

  • terms that penalise one party (but not another) for breaching or terminating the contract

  • terms that enable one party (but not another) to vary the terms of the contract

What should a business do if their contract is found to include unfair contract terms?

Step 1:

Remove the unfair contract term from the standard form contract.

Step 2:

Write to existing customers and (subject to the terms of the contract) confirm that the contract has been amended by deleting the unfair terms.

Step 3:

If you have enforced the unfair contract terms in the past, consider whether there is an opportunity to provide redress to those customers.

What should a consumer do if a contract includes unfair contract terms?

  • Ask the business to remove the term or amend it so it is no longer unfair

  • If the unfair contract term has affected you, talk to a lawyer

  • Contact your local State or Territory consumer protection agency

  • Contact the ACCC

Contract Law
Contract Law

The enforcement of the law against unfair contract terms

What is the role of the ACCC when it comes to unfair contract terms?

The ACCC is not a Court or a Tribunal and it cannot decide whether a term is unfair or not. However, the ACCC (a Federal Government agency), in conjunction with State and Territory Fair Trading bodies, administers and regulates the law relating to unfair contract terms.

This means that the ACCC accepts complaints about unfair contract terms on behalf of individuals and businesses. If the ACCC identifies a particularly concerning example of the use of unfair contract terms, it may take enforcement against the business by starting Court proceedings itself.

The ACCC also has the power to issue penalties against businesses misusing unfair contract terms.

What are the consequences for a business that has unfair contract terms in its standard form contracts?

The consequences for businesses that have unfair contract terms in a standard form contract are both commercial and legal risks, and include:

  • a poor customer experience

  • reputational damage

  • fines and penalties

  • legal fees to defend a claim

  • damages payable to the other party

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