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Unfair contract terms under the Australian Consumer Law

Andrew Bini (Principal)

Since 12 November 2016, the unfair consumer contracts terms regime in the Australian Consumer Law (ACL) has also regulated unfair terms in small business contracts.  In essence, if a term is found to be unfair it is void. In this article we describe how these laws apply to consumer and small business contracts.

Consumer and Small Business Contracts.

Section 23 of the ACL provides 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”.

A “consumer contract” is a contract for the supply of goods or services, or the sale or grant of an interest in land, to an individual who acquires the goods, services or interests wholly or predominantly for personal, domestic or household use or consumption.  It should be noted that “consumer contracts” are limited to contracts where the recipient is an individual (ie a natural person).

Section 23 also provides that a contract is a “small business contract” if the contract is for the supply of goods or services or the sale or grant of an interest in land and at the time the contract is entered into at least one party to the contract is a business that employs fewer than 20 persons and either the upfront price payable under the contract does not exceed $300,000; or the contract has a duration of morea than 12 months and the upfront price payable under contract does not exceed $1 million.

Meaning of Unfair

A term in a consumer contract or small business contract is “unfair” if:

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

In determining whether a term of a contract is unfair, a court may take into account such matters as it thinks relevant, but must take into account the extent which the term is transparent and the contract is a whole.

A term is transparent if the term is expressed in reasonably plain language; it is legible; it is presented clearly and it is readily available to any party affected by the term.

Section 25 of the ACL sets out various examples of what might constitute an unfair term.  The examples include:

  • a term that permits one party but not the other to avoid or limit its performance of the contract;
  • a term that permits one party but not the other party to terminate the contract;
  • a term that penalises one party but not the other party for a breach or termination of the contract;
  • a term that allows one party but not the other party to vary the terms of the contract; and
  • a term that allows one party but not the other party to renew or not renew the contract;

Standard Form Contracts

Section 27 of the ACL provides the following matters may indicate a contract is a standard form contract:

  • whether one of the parties has all or most of the bargaining power relating to the transaction;
  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • whether another party was given an effective opportunity to negotiate the terms of the contract that were not terms discussing subject matter or price; and
  • whether the terms of the contract (other than those discussing subject matter and price) take into account the specific characteristics of another party or the particular transaction.

Excluded contracts

It should be noted that certain contracts are excluded from the operation of Section 23, being contracts entered into before 12 November 2016 (unless renewed on or after that date), shipping contracts, constitutions of companies and similar bodies, certain contracts of insurance and contracts exempted by the Minister.

Remedies

A term of a standard form contract found to be unfair is void and, accordingly, is not binding on the parties, but the contract continues to bind the parties if it is capable of operating without the unfair term.  A party to a contract claimed to be unfair can seek a declaration to that effect, as can the ACCC and the State and Territory consumer affairs regulators.  Although damages are not available under the ACL (because it is not a contravention to enter into an unfair contract), if a declaration is made by the court that a term is unfair, the court may also make compensation orders in favour of any person who has suffered, or is likely to suffer, loss or damage.

If you require more information on this topic, please contact:
Andrew Bini, Principal, Nicholson Ryan Lawyers on +61 3 9640 0400.