Weaponising unfair contract terms

The unfair contract terms laws will be changed. When the changes are made, unfair contract terms in your standard form business contracts will be a greater operational risk for your business.

Unfair contract terms legislation has been in place for consumer contracts since 2010 and for small business contracts since 2016, but Governments think that there are still too many unfair contract terms being used by businesses. To address this, on 6 November 2020 the Federal and State and Territory Ministers for fair trading and consumer protection announced proposed amendments to the legislation. The amendments will widen the class of persons protected by the legislation, and increase the costs of getting it wrong.

Here are the key changes.

• Unfair contract terms will be made unlawful. Currently, an unfair contract term is only void (i.e. not enforceable). When the law is changed, unfair contract terms will not be automatically void, and courts will be able to order civil penalties if contracts are found to have unfair terms.

• Courts are to be given the power to impose remedies for unfair contract terms. These could include orders such as changing the terms of the contract, or an order that a term is void.

• The definition of a small business is being expanded to include a greater range of protected businesses (from businesses with less than 20 employees to businesses with less than 100 employees, or with an annual turnover of less than $10 million).

• Currently the upfront price under a small business contract must be below a certain amount for the unfair contract terms protections to apply. The amount is $300,000 (or $1 million if the contract has a duration of more than 12 months). This cap will be removed.

• A contract term will be presumed unfair if the same term or a substantially similar term has been used by the same business, or in the same industry sector, and has been found by a court to be unfair. This will make it easier for consumers and small businesses (and regulators) to prove their claims that terms are unfair. The onus of proof will be on the business using that term to prove that the term is not unfair.

• For small business contracts, the meaning of a “standard form contract” will be clarified. Contracts fall outside the unfair contract terms protections if they are not standard form contracts. The proposed changes will require courts to take into account repeat usage of the contract when determining if it is a standard form contract. There will also be clarification of when a small business has had an “effective opportunity to negotiate” the terms of a contract. When a court is determining whether a contract is a standard form contract, one of the factors that it must take into account is whether the other party was given an effective opportunity to negotiate the terms of the contract. It is proposed that the legislation would state that an effective opportunity to negotiate does not include:

  • opportunities to negotiate minor amendments that do not alter the intent or the essence of the original term;

  • opportunities for the small business to select from a pre-existing list of possible terms, rather than actually negotiating the substance of the term; and

  • when only a small subset of customers are given an opportunity to negotiate, and the rest are not.

• Contract clauses that include minimum standards or other industry-specific requirements set by Commonwealth, State or Territory legislation will be exempted from the unfair contract terms regime.

When a contract is subject to the unfair contract terms legislation, a term of the contract will be “unfair” if the term:

• would cause a significant imbalance in the parties’ rights and obligations under the contract;

• is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and

• would cause financial or other detriment to a party if it was applied or relied on.

Under the existing law, some businesses using standard form contracts might not be too concerned about the risk that contract terms may be unfair. They probably figure that the consumer or small business in many cases could not be bothered with taking the matter to court to get a ruling that a term is unfair. Most legal actions on unfair contract terms have been taken by regulators, not parties to the contracts. And if a term is found to be unfair, the rest of the contract still operates, so having it declared void might not be an issue unless the business really needed to use it in a particular case.

But it is a whole new ball game when unfair contract terms become unlawful, with civil penalties for non-compliance. Businesses will no longer have any choice but to eradicate unfair contract terms from their contracts.

It is not a simple matter to decide if a term is unfair. The concepts of “significant imbalance” in the rights and obligations of the parties, or the “legitimate interests” of the party advantaged by the term, are fuzzy. Should you amend the term or delete it? It may be necessary to include a term in the contract that prevents a party using any other term when it would cause a significant imbalance, or when it is not reasonably necessary to protect the party’s legitimate interests.

Please contact us if you need assistance reviewing your standard form contracts for unfair contract terms.

Patrick Dwyer and Kathleen Harris

Legal Directors