Are your Contract Terms Unfair? It might be Time for a Review

Rebecca Partington

A proposed change to legislation put forward for discussion before the Commonwealth Government on 24 June 2015 could affect the terms that you include in many of your usual business agreements. 

The change, if enacted, is intended to tackle the potential for small businesses to be disadvantaged by unfair contract terms which are enforced in common business agreements. This would see amendments to the current provisions Australia Securities and Investment Commission Act 2001 (ASIC Act) and the Competition and Consumer Act 2010 (CCA). 

The protection exists already for individual consumers, where they enter into agreements but have little or no bargaining power. The proposed change will extend this protection for small businesses that find themselves in the same difficult position. 

The change is important for all types of businesses to consider, as it affects any agreement where one of the parties is considered a ‘small business.’ So even if you aren’t a small business, if you’re contracting with a party which is is, your agreement may be affected. 

Under the proposed changes, a party may bring proceedings against an unfair term if the contract or agreement meets the following criteria:

One of the parties must be a ‘Small Business’

The contract will be affected if either party to the agreement employs fewer than 20 persons. Each full-time, part-time and casual employee counts as one person, however casual employees are not counted unless they are employed on a regular and systematic basis. 

The Contract Value must be under certain thresholds

The contract must be worth less than $100,000 or, for contracts which are entered into for longer than a 12 months period, less than $250,000. In determining the value of the contract, penalty fees and contingency costs are not included in the amount payable. 

It must be a ‘standard form’ Contract

Factors which may indicate that a contract is a ‘standard form’ contract are where:

  1. One of the parties has all or most of the bargaining power
  2. the contract is offered on a ‘take it or leave it’ basis, requiring the other party to either accept or reject the terms of the contract without negotiation or amendment, and/or 
  3. the contract was prepared before any discussion relating to the transaction occurred between the parties and hasn’t been amended to reflect any arrangement or negotiation between the parties.

Standard form contracts may include software licenses, franchise agreements, equipment rental agreements, finance contracts, contractor and consultancy agreements, supply and distribution agreements, trading terms and confidentiality agreements. 

Entering, renewing or amending contracts after the effective date of the changes

The change is not proposed to apply retrospectively to contracts which have been entered into already, but to contracts which are either entered into, renewed or varied after the start date of the legislative amendments. 

There must be Unfair Term(s) contained in the Contract

Quite obviously, there must actually be a term included in the contract or agreement which is ‘unfair’ in order for a claim to be brought by a party. 

A term will be considered unfair if it:

  1. Causes significant imbalance in the rights and obligations of the parties
  2. would cause detriment, either financially or otherwise, to a party if enforced, and
  3. isn’t reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

As the changes are an extension of the current consumer protection, the examples currently provided in the existing provisions provide some guidance on what may be found to be unfair. These examples include terms that:

  1. Permit one party, but not another, to terminate, vary or renew the contract unilaterally
  2. permit the price payable to be varied by one party without the need for agreement or right to terminate by the other
  3. levy excessive fees for termination or impose excessive interest rates on outstanding payments
  4. create an automatic rollover of the contract or
  5. affect or limit a party’s ability to recover for a breach by the other party. 

If a claim made by a party is successful, the unfair term will be found void and struck out from the contract. The contract will survive and continue, provided that it can with the unfair term removed. Currently, there are no fines or penalties which may be imposed for having a term declared unfair, however other relief may be available to the party who has brought the action. 

Importantly, there have been some suggestions that the proposed change will impact on financing for small businesses, in addition to creating contractual uncertainty and further compliance costs. This would almost certainly be the case as businesses would be required to identify if either or both parties entering into the agreement fall under the ‘small-business’ definition, in order to establish whether such consideration needs to be given to their contract terms.

It’s anticipated that if the Government approves the changes by the end of this year, that businesses will have a transition period of six months until they are effective. All businesses should make sure they review and seek advice on any standard term contracts which may be used, in order to consider if there is any risk that various terms could be declared void for being unfair. 

Rebecca Partington, Lawyer
Phone: 02 9895 9266
Email: rpartington@colemangreig.com.au