Many consumers and small businesses benefit from the Australian Consumer Law (ACL) and the protections that it affords against unfair contract terms. As a small business owner, it is important that you:
- review each contract you enter into across all aspects of your business; and
- consider whether any of the provisions are unfair, particularly if the other party is a bigger business and has provided you with a standard form contract.
In this article, we will consider the various unfair terms which may be in a contract, why they may be classified as unfair and how to best protect yourself.
What is an Unfair Term?
Often, terms do not appear to be unfair on first reading. Considering the effect of the term can assist in telling an unfair term from a reasonable one. A term may be unfair, and therefore unenforceable, if it:
- causes a significant imbalance in the rights and obligations of the parties;
- is not reasonably necessary for protecting the legitimate interests of the business; or
- causes detriment to you if the other party sought to rely on them.
The Servcorp Case
The Servcorp case demonstrates the active approach of the Australian Competition and Consumer Commission (ACCC) against large companies who have unfair provisions in their standard form contracts. Servcorp is a company that enters into standard form contracts with small business clients to license out office spaces. The ACCC received complaints from these small businesses, claiming that their:
- contracts were unfairly extended; and
- service fees unilaterally increased.
The ACCC investigated the complaints and eventually commenced court proceedings against Servcorp. The court ruled that Servcorp’s contracts were unfair under the ACL. In this case, the types of terms that were unfair were about:
- automatic renewals;
- limitations on claims;
- service charges;
- breach of contract;
- termination; and
While most contracts include terms of these kind, it was the effect of the terms in Servcorp’s standard form contracts that were unfair.
1. Automatic Renewals
Automatic renewals are common provisions in contracts. In practice, they provide that if either party fails to notify the other that it wishes to cancel the contract after the initial term, the contract will automatically renew for a further term.
In the Servcorp case, the issue was not that there was an automatic renewal regime, but that Servcorp could increase the service fee to whatever price it wanted upon contract renewal. This provision was unfair as it:
- created a significant power imbalance between the parties; and
- would probably cause financial detriment to a client who fails to opt out of the renewal in time.
If your contract contains an automatic renewal provision, you should review this to ensure that:
- you have sufficient time to opt out of the renewal; and
- the other party does not have a right to change the contract fees on automatic renewal.
2. Limitations on Claims
The insurance provisions in Servcorp’s standard form contracts limited a client’s right to sue Servcorp, even when the client had a legitimate claim. Furthermore, there was no provision limiting Servcorp from claiming against their clients, again creating a significant power imbalance between the parties.
When reviewing a contract, ensure that the right to sue is reciprocal. If there is a clause limiting your ability to sue the other party, make sure you understand what this means for you and your business.
3. Service Charges
A common unfair contract term involves one party having the sole right to change, review or vary service charges without notice. This is unfair because the other party may have to pay higher costs without:
- any opportunity to negotiate; or
- receiving a corresponding benefit.
If your contract contains a provision allowing the other party to vary the price or services without notice, then you should consider having the provision removed or amended. You may wish to modify the provision to give you the right to terminate the contract if there is an increase.
Any right to terminate a contract for breach should include an obligation on the other party to:
- notify you of the breach; and
- provide you with an opportunity to rectify that breach before taking action.
Servcorp’s contracts contained a provision allowing Servcorp to terminate contracts if they thought the other party was breaching the contract. Although this may appear reasonable, the provision gave Servcorp the discretion to terminate the contract in circumstances where the client was not:
- aware of the breach; or
- given an opportunity to remedy the breach.
Thus, the provision was deemed unfair.
Servcorp’s contracts contained a clause allowing Servcorp to terminate the contract at any time by giving its clients written notice one month in advance. As per this provision, Servcorp did not have to provide the client with a reason for their termination. This clause was unfair, as Servcorp could exercise this right without:
- a valid reason; and
- compensating the client.
In contrast, Servcorp’s clients had minimal termination rights. In a contract, you should ensure that both parties have equal termination rights.
6. Security Deposit
If Servcorp’s clients failed to demand a refund of their security deposit within 360 days of the end of the term, the security deposit would be forfeited. Although 360 days may seem like a sufficient amount of time to demand a refund, the court found that this provision was unilaterally giving Servcorp the right to acquire its client’s property. It created a significant imbalance between the parties and was therefore unfair.
If you are providing a security deposit, it should automatically be returned to you at the end of the term without requiring that you issue a specific demand.
While all contracts different, there are some terms common to most contracts. It is essential to look out for unfair terms before signing a contract, as this will assist in avoiding disputes. As demonstrated by the Servcorp case, considering the effect of the term will be helpful in determining whether it is unfair.
If you have any questions, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.
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