Unfair Contracts

Prior to the enactment of the new legislation, the application of the unfair contracts consumer protection regime was limited to individuals acquiring goods, services or interests in land predominantly for personal, domestic, or household use or consumption. The new legislation extends the application to standard form contracts that meet the definition of a small business contract.

Does the regime apply to your contract?

You need to consider:

• Whether your entity meets the definition of a ‘small business’ or whether you or your entity are contracting with an entity that meets the definition
• Whether the contract falls within the monetary thresholds for a ‘small business contract’
• Whether the contract is a ‘standard form contract’
• Whether one or more of the contractual terms satisfies the criteria to render them ‘unfair’
• Whether the contract falls within one of the limited categories of contract that are excluded from the regime

Is the contract a ‘Small Business Contract’?

For the purposes of the legislation, a small business contract is a contract where at least one party to the contract is a business that employs less than 20 people. In some cases, casual staff may be included in the calculation if they are employed on a regular basis. In addition, for the contract to fall within the regime the upfront price payable must be less than $300,000 (where the contract term is for less than a one year term ) or less than $1 million (where the contract term is for one year or more).

Is the term unfair?

A contractual term will be unfair in the following circumstances:

• There is a significant imbalance in parties’ rights and obligations;
• The term is not reasonably necessary to protect the legitimate interests of the party; and
• Reliance on the term would cause detriment (financial or otherwise).

Importantly, for a term to be unfair for the purposes of the regime it must meet all three of the criteria above. Examples of contractual terms which may be unfair include terms that permit one party to unilaterally vary the contract or terms that enable one party (but not the other) to terminate the contract or determine whether a breach has occurred. However, assessing whether a term is actually unfair for the purposes of the regime requires an analysis of the particular circumstances. For example, a term which would be unfair in one context may be reasonably necessary to protect a party’s legitimate interests in another context.

Consequences

If it is determined that a term in a contract covered by the regime is unfair, the term will be void and the remainder of the contract will only continue to operate if it can do so without the unfair term.

Consumers can take court action to enforce their rights or recover loss for breach of the Australian Consumer Law. In addition, the ACCC, ASIC and state and territory consumer protection agencies may also take enforcement action. Aside from the term being deemed void, Courts have broad powers including but not limited to issuing an injunction to prevent a party from acting on an unfair term, making an order that a party pays compensation and/or making any other order that it otherwise deems appropriate.

What should you do?

Have your standard contracts reviewed by a lawyer to ascertain whether you have terms which are unfair and could render your contract completely unenforceable.

For more information please contact Felicity Simpson or a member of our Business Law Team.