Understanding Unfair Contract Terms: Protecting Your Business

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Executive Summary

The Australian Consumer Law (ACL) is contained within schedule 2 of the Competition and Consumer Act 2010 (Cth). The ACL provides consumer and small business protection uniformly across all states and territories within Australia, dealing with areas such as protection from unfair contract terms.

Within this article, our expert commercial litigation lawyers will discuss unfair contract terms and the consequences of a party relying on them.

Unfair Contract Terms

Business owners need to ensure that any contract provided for their services or goods, do not contain or rely upon unfair contract. If they do, then they could be liable for penalisation.

What are unfair contract terms?

Section 23 of the ACL stipulates that a term of a consumer contract or small business contract is void if the term is unfair and the contract is a standard form contract.

What is a Consumer Contract?

A consumer contract is a contract for:

‘(a) a supply of goods or services; or

(b) a sale or grant of an interest in land;

to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.’

What is a Small Business Contract?

A contract is a small business contract if:

‘(a) the contract is for a supply of goods or services, or a sale or grant of an interest in land; and

(b) at least one party to the contract satisfies either or both of the following conditions:

(i) the party makes the contract in the course of carrying on a business and at a time when the party employs fewer than 100 persons;

(ii) the party’s turnover, worked out under subsection (6) for the party’s last income year (within the meaning of the Income Tax Assessment Act 1997) that ended at or before the time when the contract is made, is less than $10,000,000.’

            What are standard form contracts?

If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise.

What are the elements?

Further, section 24 of the ACL goes on to state that a term of a consumer contract or small business contract is unfair if:

‘(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.’

Examples of Unfair Contract Terms

Section 25 of the ACL provides various examples of unfair contract terms, including but not limited to:

(a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;

(b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;

(c) a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;

(d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;

(e) a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;

(f) a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;

(g) a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;

…’

Consequences of Unfair Contract Terms

If the Court or QCAT finds that a term is unfair, then that term will be void and unable to be relied upon. The remainder of the contract will continue to exist to the extent it can do so without the unfair contract term.

If a party attempts to rely upon an unfair contract term, it constitutes a contravention of the ACL, and the Court may make any of the following orders:

a. An injunction, restraining the party from acting upon the term;

b. Compensation for any damages suffered due to the other party relying upon the unfair contract term;

c. An order to provide redress to non-party consumers or small businesses; and

d. Any other order the Court thinks appropriate, which can include rescission of the contract or a variation to the contract.

Relevant Case Law

In the case of Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928, the Federal Court declared the following terms (among others) were unfair, and void:

a.    Automatically renewing contracts without notice to the customer and only allowing the customer a certain period before the end of the term to cancel the contract.

b.    Unilaterally varying the price charged to customers and the rights and obligations between the parties.

c.    Disproportionate termination terms, where they can terminate the contract on materially broader grounds then their customers.

In the case of ACCC v Servcorp Ltd [2018] FCA 1044, the Federal Court held that an automatic renewal clause caused a major imbalance in the rights and obligations of the parties because the business wasn’t required to inform their customers of the upcoming renewal date. The Court highlighted that the business was more aware of contract renewal dates than its small business customers, who might unknowingly find themselves committed to a new term at a higher price.

Further, in ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224, the Federal Court found that an automatic renewal clause caused significant imbalance, as the business didn’t need to notify customers of the renewal date, and the customers only had a 30-day window to cancel. This often led to customers missing the termination opportunity, locking them into long terms.

In each of these cases, they were required to amend their respective contracts with their customers to remove any unfair contract terms. Fuji were required to also advertise that the terms (set out above) were unfair and the pay ACCC’s legal costs in the sum of $250,000.00, while Servcorp had to pay $150,000.00 for the ACCC’s legal costs.

Conclusion

These cases demonstrate the serious consequences that may arise from a party attempting to rely upon unfair contract terms.

It is therefore crucial that if you are operating a business, that you obtain legal advice to ensure that your contracts or agreements do not contain or attempt to rely upon unfair contract terms.

Free Consultation

At Odyssey Legal, our commercial litigation lawyers are experts in dealing with ACL claims and advising on unfair contract terms.

Take the first step to protect your business by booking your free consultation with our expert commercial litigation lawyers.

It’s as easy as filling out your details on our website (Contact us) or ringing our office on 07 5370 8759.