Demystifying the magic of unfair contract terms

Sharon Givoni Consulting Intellectual Property

Unfair contract terms are something we are all wary of and most of us have probably been victim to them at some point in our lives.

Consider the following scenarios:

• You enter into a long-term contract with a supplier for the supply of wood and hidden in the fine print are terms which give them the right to unilaterally vary the terms of the contract, such as how or when payments are to be made.
• You agree toinstall designer lights in your client’s outdoor entertainment area however,you insert a clause enabling you to suspend service without cause. That way,you can secure a more valuable job should it arise.

The above scenarios potentially contain unfair contract terms. A key question relevant to protecting your business interests is whether you (or parties you enter into contracts with) can rely on such terms to enforce these contractual ‘rights’ in practice.

A case on point

A 2008 study by Mann & Siebeneicher found that out of 266 US online consumer contracts, about 90% of them had terms which purported to exempt sellers from implied warranties pertaining to their product. Such contracts with one-sided terms are not uncommon – just look at your mobile phone contract, gym membership or those terms you agreed to by ticking the box when signing up to anything.   

It’s your way or the highway

Human beings are arguably simple creatures. We know what we want and generally, when we do have the upper hand, we want to push the boundaries and make the most out of the situation. In this scenario, it is easy to put a pre-prepared contract under someone’s nose and get them to sign it, knowing how badly they need the business in this highly competitive market.

However, when the tables are turned, is this really fair?

It doesn’t seem like it. Therefore, the government has stepped in and shaken things up to save people time and effort from trawling through and negotiating every single contractual term.

Recent developments

The unfair contract term provisions are part of The Australian Consumer Law and came into effect on 2 November 2016.

The aim of these changes was to essentially protect small businesses from unfair contract terms in business-to-business standard form contracts.

What types of contracts are captured by the law?

Small business contracts

Most relevant is that the contract must be a ‘small business contract’ as follows:

• Goods or services must be supplied under the contract;
• One party to the contract must have less than 20 employees (generally excluding casual employees); and
• either of the following must apply:
  • the upfront price payable under the contract must not exceed $300,000;
  • The contract has a duration of more than 12 months and the up front price payable under thecontract does not exceed $1,000,000.

Standard form contracts

The unfair contract term provisions apply to ‘standard form contracts’ that areentered into, varied on or after, or renewed on or after 12 November 2016.

A standard form contract is one that has been prepared by one party to the contract and where the other party has little or no prospect to negotiate the contract terms. Further, such kind of contract is generally offered on a “take it or leave it” basis.

In determining whether parties have entered into a standard form contract one must consider:

• The balance in bargaining power;
• Preparation of the contract before actually negotiating an agreement;
• Whether the contract was put forward on a “take it or leave it” basis; and
• Whether the terms actually took into the deal being made or the parties involved.

What are unfair contract terms?

In determining whether a clause of the contract is unfair, the Courts will generally apply a three-limbed test for unfairness.

This test states that the term would be unfair if (on the balance of probabilities) it:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
• would cause detriment (whether financial or otherwise) to a party if it was to be applied or relied on.

The effect of having an unfair term

Unfair contract terms in these above circumstances would be void, meaning that they are unenforceable on the parties. The rest of the contract can continue on foot to the extent that it is capable of operating without the unfair term.

It is worth noting that terms which define the main subject matter of the contractor sets the upfront price payable under the contract or is a term required, orexpressly permitted, by the law generally cannot be deemed ‘unfair’.

Examples of unfair terms

It is important to highlight that the unfair contract terms provisions do not apply to contracts entered into before 12 November 2016 (unless renewed on or after this date).

The ACCC acknowledges certain contractual terms as unfair:

• Terms that enable one party (but not another) to avoid or limit their obligations under the contract.
• Terms that enable one party (but not another) to terminate the contract.
• Terms that enable one party (but not another) to vary the terms of the contract.
• Terms thatpenalise one party (but not another) for breaching or terminating the contract.

Terms that define the main subject matter of the contract and terms that set the upfront price payable are not considered to be unfair.

In October 2017, the ACCC challenged standard form waste management contracts provided to small businesses by a company called Richards & Sons Pty Ltd. The Court found a number of terms to be void on the basis that they were unfair. For example, charging customers for services not rendered even when it was caused by reasons beyond the customer’s control.

It is ultimately up to a court or tribunal to decide if a contractual term is unfair.

What steps should you take?

Trying to ensure contracts are fair is a two-way street. It’s easy to be taken advantage of and even easier to take advantage. Being proactive in these situations at the beginning is generally likely to protect you and your business in the long run.  

Therefore, before signing a contract, you should thoroughly read through its terms and understand what you are signing. If you suspect that a term in your contract is unfair, you can let the other party know your concerns and ask them to amend it. Due to the complicated nature of this area of law, you can also speak to a lawyer for legal advice about the unfair terms. The lawyer will help you make sure the terms in a standard form contract are actually enforceable. Alternatively, your local state or territory consumer protection agency or the ACCC can offer more information and support about your concern.

Sharon Givoni is a Melbourne-based intellectual property lawyer with clients in the window furnishings industry (www.sharongivoni.com.au). Sharon’s book Owning It: A Creative’s Guide to Copyright, Contracts and the Law, available through Creative Minds Publishing (link to www.creativemindshq.com/owningit), aims to demystify the law for creative and small business owners regarding the protection of their designs, trade marks, copyright, reputation, confidential information and other intellectual property.

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IMPORTANT DISCLAIMER: This article is of a general nature only and must not be relied upon as a substitute for tailored legal advice from a qualified professional.

By George K Abraham