Businesses Should Review Their Standard Form Contracts for Unfair Terms

By Joseph Santhosh, Special Counsel and Devin Elliott, Lawyer

All businesses should have their standard form contracts reviewed to reduce the risk of contractual terms being void as unfair terms under section 23 of the Australian Consumer Law (ACL), as set out in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA).

Part 2-3 of the ACL outlines the unfair contract terms regime, which applies to both:

2. Small business contracts – meaning a contract for the supply of goods or services (or sale or grant of an interest in land) where:
   • (a) at least one party to the contract is a business employing fewer than 20 persons; and
   • (b) the upfront price payable under the contract does not exceed $300,000 or, if the contract has a duration of more than 12 months, does not exceed $1,000,000; and
3. Consumer contracts – meaning a contract for the supply of goods or services (or sale or grant of an interest in land) to an individual whose acquisition of the same is wholly or predominantly for personal, domestic or household use or consumption.

When are terms unfair?

A term is ‘unfair’ if:

1. It would cause significant imbalance in the parties’ rights and obligations arising under the contract;
2. It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged; and
3. It would cause detriment (whether financial or otherwise) to a party if it were relied upon.

Examples of ‘unfair’ terms include terms which permit one party (but not the other) to:

• (a) terminate the contract;
• (b) vary the contract terms;
• (c) renew or not renew the contract;
• (d) interpret the contract’s meaning or unilaterally determine whether it has been breached;
• (e) limit vicarious liability for its agents; or
• (f) limit the other party’s right to sue.

Available Remedies

If a contract entered into or renewed on or after 12 November 2016 is found to contain an unfair term, a court can make an order that the term is void, provide compensation to any aggrieved party by way of damages, or prevent a party from relying on the term via an injunction.

Proposed Legislative Amendments

Draft legislation, which is anticipated to pass into law, proposes to amend the unfair contract terms regime (Proposed Legislation) to:

• require the court to consider, when determining if a contract is a ‘standard form contract’, whether one of the parties has used the same or similar contract before;
• update the definition of ‘small business contracts’ to apply where at least one party to the contract is a business that employs fewer than 100 persons or has a turnover for the last income year of less than $10 million;
• implement a rebuttable presumption that a term is unfair if:
  1. it has been found to be unfair in another proceeding involving the same person who proposed the term; or
  2. if the contract is in the same industry as another contract which also contained that term where the term was previously found to be unfair;
• allow pecuniary penalties to be imposed if a person relies on an unfair contract term in a standard form business contract;
• allow the court to make orders to prevent or reduce loss or damage caused by the unfair term; and
• allow the court to order an injunction to prevent a person from entering future contracts that contain the same unfair term (or a similar term).

The Proposed Legislation has not yet passed into law but is anticipated to do so. Hence, businesses should consider the above matters in any review of their standard form contracts.

Next Steps

We recommend that all businesses, in particular those with an annual turnover of up to $10 million, have their standard form business contracts reviewed for unfair terms to reduce the risk of the term being void and, further, to avoid pecuniary penalties if the Proposed Legislation is enacted.

If you are unsure whether your standard form business contract contains an unfair term and would like us to review and advise on the same, please contact Joseph Santhosh on (03) 8540 0273 or joseph.santhosh@mst.com.au, John Sier on (03) 8540 0270 or john.sier@mst.com.au, or Michael Carr on (03) 8540 0260 or michael.carr@mst.com.au.