The concept of unfair contract terms is governed by the Australian Consumer Law (“ACL”) and applies to the category of commercial contracts that are standard form consumer contracts (if entered into after 1 July 2010) and standard form business contracts (entered into after 12 November 2016).
While there is no definition of a standard form consumer contract in the ACL, in broad terms, they are contracts that are pre-prepared and provided to a consumer on a “take it or leave it” basis with no opportunity to negotiate the terms and must relate to the supply of goods, services including even the sale of land.
Some examples of standard form contracts include but are not limited to insurance policies, building contracts, loan agreements, franchising agreements, airlines and travel contracts, terms and conditions incorporating privacy policies, software and online services and electricity and gas supply contracts.
A term of a standard form consumer or small business contract will be unfair if it:
- would cause a significant imbalance in the rights and obligations of the parties under the contracts;
- is not reasonably necessary to protect the legitimate interests of the party who is advantaged by the term; and
- would cause detriment, whether financial or otherwise, to a party if it were to be applied or relied upon.
The onus of proving that a term in a contract is not unfair is on the supplier whose terms are challenged. This means that a party who alleges that a term in a contract is unfair is presumed to be correct unless the other party proves otherwise.
The law at present is that if a standard form contract incorporates an unfair term, a court can declare that term void such that the infringing term will not apply. The effect of an unfair term in a contract is that it is void and of no effect but the other terms of the contract will continue to be binding if capable of operating without the unfair term. This means that unfair terms, if declared void, cannot be relied upon or applied by a supplier.
Parliament has recently passed laws for the introduction of penalties for businesses that include unfair contract terms in their standard form contracts with consumers and small businesses. Now, not only may a term be declared void but penalties may also apply to suppliers for having included that term in a standard form contract.
Complaints regarding unfair terms in standard-form contracts may not only be made by individuals but also by small businesses in their dealings with larger businesses. Currently, individuals as well as small businesses employing fewer than 20 persons can take action for breaches under existing unfair term provisions. The new federal laws extend the reach to small businesses that employ fewer than 100 persons or have an annual turnover of less than $10 million. Importantly the new laws will apply irrespective of the value of the contract between the parties. These penalties were not previously part of the armoury of the ACCC when confronted with complaints from consumers alleging unfair contract terms.
The amendments to the ACL regarding the expanded reach of the ACCC regarding the unfair term provisions of the ACL in particular compliance with such provisions and the imposition of penalties are not yet law and are expected to come into effect within 12 months. This will allow companies to review and amend their standard form contracts to ensure compliance with relevant laws.
Noncompliance with the new provisions of the Act regarding unfair terms in standard-form contracts could now have severe financial implications. As a result, businesses should not leave things to the last minute and should consider immediate action starting with a review of their existing standard form contracts.