Unfair Contract Terms

From 12 November 2016, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 will extend existing protection from unfair terms under the Competition and Consumer Act 2010 and the Australian Securities Investment Commission Act 2001 to small businesses that enter into (or renew, or vary) small business contracts that are standard form contracts.

A term is unfair if it:

  • causes a significant imbalance in the parties’ rights and obligations; and
  • is not reasonably necessary to protect the interests of the party the term benefits; and
  • would cause detriment to a party if it were applied or relied on.

In determining whether a term is unfair, a court must also consider how transparent the term is, and the overall rights and obligations of each party under the contract.

Legislation

Currently, the Competition and Consumer Act 2010 (CCA) including Schedule 2, the Australian Consumer Law (ACL) and the Australian Securities Investment Commission Act 2001 (ASIC Act) protect individual consumers from unfair terms in consumer contracts.

On 20 October 2015 Parliament passed the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015, which by way of the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Small Business Amendment), will from 12 November 2016 extend unfair contract terms protection contained in the CCA and the ASIC Act to small businesses.

Application

The Small Business Amendment will apply to small business contracts renewed or entered into after 12 November 2016. If however a small business contract is entered into before 12 November 2016 and is subsequently varied on or after 12 November 2016, the Small Business Amendment will apply, but only to the varied terms.

A small business contract is one where:

  • it is for the:
  • supply of goods or services; or
  • the sale or grant of an interest in land, and
  • at least one of the parties is a small business (employs fewer than 20 people, including casual employees if they are employed on a regular and systematic basis); and
  • the upfront price payable under the contract (including future payments that are to be made under the contract)
    • does not exceed $300 000; or
    • if the contract has a duration of more than 12 months, does not exceed $1 million.

A term of a small business contract is void if the term is unfair, and the contract is a standard form contract.

What is a standard form contract?

The Australian Competition & Consumer Commission (ACCC), which enforces the ACL, defines a standard form contract as:

“one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms – that is, it is offered on a ‘take it or leave it’ basis."

The gym industry and the motor vehicle rental industry, for example, often utilise standard form contracts.

A Court must take into account the following factors in making a determination as to whether or not a contract is a standard form contract:

  • the balance of bargaining power relating to the transaction;
  • if a party prepared the contract before any discussion relating to the transaction occurred between the parties;
  • whether the contract was offered in terms of “take it or leave it”, other than specific terms referred to in the ACL or the ASIC Act;
  • whether each party had the opportunity to negotiate the terms of the contract, other than specific terms referred to in the ACL or the ASIC Act;
  • whether the terms of the contract, other than specific terms referred to in the ACL or the ASIC Act, took into account the specific characteristics of each party or the particular transaction;
  • any other matter prescribed by the regulations.
What is an unfair term?

A term is considered ‘unfair’ if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

An unfair term would be, for example:

  • a term that permits one party (but not another) to terminate the contract;
  • a term that permits one party (but not another) to vary the terms of the contract;
  • a term that limits one party’s (but not another’s) right to sue another party.

A Court may declare that a term in a small business contract is an unfair term upon application by a small business, the ACCC, or the ASIC.

In determining whether a term is unfair, a court must also consider how transparent the term is, and the overall rights and obligations of each party under the contract. A term is transparent if the term is:

  • expressed in reasonably plain language; and
  • legible; and
  • presented clearly; and
  • readily available to any party affected by the term.

Once a term has been declared unfair, the term will become void, and cease to bind the parties to the contract.The rest of the contract will continue to operate to the extent it may do so without the unfair term.

Contracts that will not be affected by the Small Business Amendment
  • contracts entered into before 12 November 2016 (unless renewed or varied on or after 12 November 2016);
  • certain shipping-related contracts; or
  • contracts that are the constitution of a company, managed investment scheme, or other kind of body.
Terms that will not be affected by the Small Business Amendment
  • terms that define the main subject matter of the contract;
  • terms that set the upfront price payable under the contract; or
  • terms required, or expressly permitted, by a law of the Commonwealth, a State, or a Territory.

If you need any assistance in this regard, or wish to discuss any aspect of this further, Hicksons is able to help.

Post by Rod Cameron, Bernard Evans and John Kell 

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