Unfair Contract Terms – Are your contract terms fair?

Many business owners incorrectly assume that they can insert any terms into their contracts (or terms and conditions) and they’ll be binding. This is not the case. The Competition and Consumer Act 2010 (Cth) Sch 2 (Australia Consumer Law) (ACL) seeks to protect consumers and small businesses from contracts with unfair terms. If a term in a standard form contract is deemed ‘unfair’ by a Court, the contract may still continue to operate but the unfair term will be severed from it.

Who is impacted?

Certain consumers and small businesses may rely on the ACL and ask a Court to sever an unfair term from a contract. Only certain small business contracts entered into or renewed from 12 November 2016 are impacted by this regime.

When drafting your contract, it is important to consider who your client and/or customers are. This will help you determine if your contract will be impacted by this regime. If you do not take such considerations into account at the time of drafting, once the contract has been entered, various terms of your contract and/or the entire contract may be deemed unfair and unenforceable.

The Standard Form Contract

While the ACL does not define what a standard form contract is, some of the usual features of a standard form contract include:

  1. a pre-prepared contract which is issued to all clients/customers;
  2. a contract that is unable to be amended;
  3. the business that prepares the contract does not engage in negotiations as to the terms of the

contract.

Example of such contracts includes gym membership or mobile phone contracts. Many small businesses operate with standard form contracts by way of utilising a credit application which includes the businesses terms & conditions. These too may be caught by the ACL.

Unfair Terms

There are many terms that may be deemed ‘unfair’ in a contract. The ACL provides specific examples of unfair terms, some of which include:

  1. terms which allow for only one party to terminate the contract;
  2. terms which allow for only one party to avoid or limit performance of the contract;
  3. terms that operate to automatically renew a contract; or
  4. terms which penalise only one party for breaching or terminating the contract. [1]

The Result

If a term is deemed to be unfair by a Court, the term is ‘severed’ from the contract. By severing the term, it will be treated as though it never formed part of the contract in the first place. The result is that the contract may continue to operate with the ‘unfair’ term removed, thereby potentially affecting the parties rights and obligations under the agreement.

Considerations

Businesses issuing the contract – All business owners operating with a standard form contract should ensure that the terms of their contract are reviewed or amended to comply with the ACL unfair term provisions. You might also decide to give customers the right to negotiate and/or discuss the terms of the contract with you prior to having them sign up. Afterall, if any of your terms are deemed to be unfair, you may not be able to rely on them, especially if a contract dispute arises. It’s a good idea to have your lawyer review your terms and advise whether they meet the requirements of the ACL.

For the client/customer - If you have entered into an agreement as a consumer or small business and you believe a term is unfair, you should obtain prompt legal advice. If the term is unfair, it may change the nature of your rights and obligations under the contract. Of course, obtaining legal advice prior to entering into a contract is always the safest way to go.

[1] Section 25, Competition and Consumer Act 2010 (Cth) Sch 2 (Australia Consumer Law)

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