A term of a contract that is an unfair contract term will be void, meaning it will be unenforceable against you. The unfair contract terms regime is set out in the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The regime applies to certain types of contracts, which in particular circumstances may impact you.
The purpose of this article is to provide an overview of where the unfair contract regime applies and what constitutes an ‘unfair’ term that is capable of being severed from the provisions of a contract.
CONSUMER CONTRACTS & SMALL BUSINESS CONTRACTS
The unfair contract terms regime applies to two types of contracts:
- consumer contracts; and
- small business contracts.
A consumer contract is a business-to-consumer contract under which:
- an individual;
- acquires goods, services, an interest in land, financial products or financial services;
- wholly or predominantly for personal, domestic or household consumption.
A small business contract is a contract:
- for goods, services, an interest in land, financial products or financial services;
- where at least one party to the contract is a business that employs fewer than 20 persons; and
- where either:
a. the upfront price payable under the contract is equal to or less than $300,000; or
b. the contract has a duration of more than 12 months and the upfront price is equal to or less than $1,000,000.
STANDARD FORM CONTRACT
In addition to being either a consumer contract or a small business contract, the contract must be a standard form contract in order to be caught by the unfair contract terms regime.
The expression ‘standard form contract’ is not defined in the ACL or the ASIC Act. However, a contract will generally be held to be a standard form contract if it is:
- for a common type of transaction;
- in a printed form; and
- offered to consumers on a “take it or leave it basis.”
TESTS FOR DETERMINING UNFAIRNESS
A contract term will be held to be unfair where all three of the following tests must be satisfied:
1. First Test – Significant Imbalance
Unfairness involves a factual determination as to whether the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract.
The party claiming that a certain contract term is unfair must establish the existence of a significant imbalance on the balance of probabilities.
2. Second Test – Not required to protect legitimate interests
The second test is whether to term is reasonably necessary to protect the legitimate interests of the party advantaged by the term.
A term of a contract is presumed not to be reasonably necessary, unless the advantaged party can prove otherwise.
3. Third Test - Detriment
The final test of unfairness requires a finding that the term complained of would cause detriment to a party if it were to be applied or relied on. The detriment need not be financial, or exclusively financial, in nature.
EXAMPLE OF UNFAIR CONTRACT TERMS
The case of Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd provided a number of examples of unfair contract terms. In that case, the court found that 8 of 18 contract terms were unfair and declared void. Some of the terms held to be void included:
1. (automatic renewal) –the contract automatically renewed within 30 days before the end of the term;
2. (amended prices) –JJ Richards could unilaterally amend their prices on 30 days’ notice;
3. (exclusivity) – JJ Richards had an exclusive right to provide waste services to the customer;
4. (suspending services) – JJ Richards accepted no liability for not providing the services at the agreed times; and
5. (termination) – the customer could not terminate the agreement if it owed any amount to JJ Richards.
It is important to note that certain contracts and terms are specifically excluded under the ACL and the ASIC Act from the unfair contract terms regime. Such contracts and terms include:
- 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;
- certain insurance contracts (e.g. car insurance);
- contracts in sectors exempted by the Minister – no sectors are currently exempt.
- 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).
CONSEQUENCES OF A CONTRACT TERM BEING UNFAIR
If a term of a consumer contract or small business contract is held to be unfair, then that clause will be void.
If a term is void for unfairness, it will either be severed from the contract, or the whole contract will be invalidated.
An unfair term will be severed if the remainder of the contract can still operate in practice without it. If the term goes to the root of the contract (meaning it affects the entirety of the contract), then the whole contract will fail.
In addition to this, the court may grant compensation to the vulnerable party; or alternatively, make any other order the court determines to be appropriate.
HOW CAN MCINNES WILSON LAWYERS HELP?
McInnes Wilson Lawyers can assist by:
- confirming whether a contract is subject to the unfair contract terms regime under the ACL and the ASIC Act;
- reviewing the terms of a contract and determining whether any of its terms are unfair; and
- negotiating and preparing the terms of a company or business’ standard form contract.
If you require any further information on any of the abovementioned material, please contact Anthea Faherty.
 This is subject to change, following the recommendations of the Hayne Royal Commission.