Unfair Contract Term or Bad Deal?

Business Law: 20 July 2023

Author: Ralph Davies, Lawyer - Our People

With the amendments to the unfair contract term regime set to apply from 9 November 2023, it is a prudent time for a refresher on unfair contract terms. If you want more information on these changes, see our ‘Expansion to Unfair Contract Terms Regime’ article.

Principle of Unfair Contract Terms

The principle of unfair contract terms appears at odds with the basic principles of contract law. Freedom of contract is an integral element of contract law by preserving the integrity of the bargaining process of two parties looking to make a deal. A number of legal remedies are available where this process is jeopardized, such as misleading and deceptive conduct, non est factum (a lack of capacity to contract) and duress.

Nonetheless, if two consenting parties mutually agree to enter into a contract containing an unfair contract term, this will be deemed void and unenforceable in standard form contracts by virtue of section 23 of Australian Consumer Law, Schedule 2 of the Competition and Consumer Act 2010 (ACL). To prevent individuals who entered into a bad deal from attempting to void unfavorable terms by claiming an ‘unfair contract term’ (thereby defeating the legitimate interests of the other parties to the contract), the ACL provides specific requirements for a term to be deemed ‘unfair’. These are set out in section 24 of the ACL.

Standard Form Contracts

The first element is whether the contract in question is a standard form contract. A standard form contract is a contract that has been prepared by one party to provide to the other, without negotiation between the parties. This usually means the contract is offered on a ‘take it or leave it’ basis. Seeing as these forms of contract do not adhere to the principles of freedom of contract, the ACL ensures contractual fairness is maintained.

Consumer or Small Business Contract

The second element is whether the contract is a ‘consumer’ or ‘small business’ contract. For a consumer contract, at least one party to the contract must be a consumer by acquiring goods, services or an interest in land that is wholly or predominantly for personal, domestic or household use or consumption. A small business contract applies to businesses that employ fewer than 20 persons, where the upfront price payable for the contract does not exceed $300,000, and/or the contract has a duration of more than 12 months and the upfront price payable does not exceed $1,000,000.

Meaning of ‘Unfair’ Contract Term

Once the above elements are met, the above, the section 24 of the ACL provides guidance on the meaning of unfair as follows:

1. The term would cause a significant imbalance to the party’s rights and obligations arising from the contract;
2. It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. It would cause determinant (financial or otherwise) to a party if it were to be applied or relied on.

When determining whether a term is ‘unfair’, the Court will also consider the transparency of the term and the contract as a whole. A term will be deemed transparent if it is expressed in reasonably plain language, is legible, presented clearly and is readily available to any party affected by the term.

Unfair Contract Term Examples

Courts have provided examples of ‘unfair’ clauses when interpreting the ACL. Stewart J in the recent federal court decision Australian Competition and Consumer Commission (ACCC) v Fujifilm Business Innovation Australia Pty Ltd & Anor [2022] FCA 928, noted the following examples of unfair clauses:

1. Disproportionate termination clauses, where one party may terminate the contract in a significantly wider range of circumstances than the other;
2. Limitation of liability terms that significantly limits the liability of one party, while not providing corresponding rights to the other; and
3. Variation terms that permit one party to unilaterally vary terms of the contract (including price changes and party rights and obligations).

Time to Review

If your business regularly uses standard form contracts it is a prudent time to undertake a review to ensure no unfair contract terms are present. It is significantly more cost effective to proactively review your contracts than be caught out by the ACL. If you are unsure if your contract contains any unfair provisions, we are happy to assist.