In Short
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The unfair contract terms rules apply to small businesses using standard form contracts with consumers or other small businesses.
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Watch for problematic terms: automatic renewals, unilateral price rises, unclear pricing, commentary restrictions, and unfair indemnities.
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Breaching these rules can lead to your contract terms being void and possible large fines.
Tips for Businesses
Review your standard form contracts regularly to spot and remove any terms that may be considered unfair under Australian Consumer Law. Always ensure contract terms are clear, pricing is transparent, and avoid clauses that restrict feedback or hold others responsible for losses outside their control.
If you are a small business, the Australian Consumer Law’s unfair contract terms provisions apply to you. The provisions aim to protect businesses and consumers with limited bargaining power from being disadvantaged by unfair contracts. As you sign contracts with consumers or other small businesses, you should ensure that any contractual terms do not violate the provisions. This article will explain five key examples of unfair contract terms to review in your standard form contracts.
When Do the Unfair Contract Terms Apply?
The unfair contract terms regime in the Australian Consumer Law applies to consumer contracts and small business contracts that are a standard form contract.
In Australia’s laws related to contracts, there is no exact definition of a standard form contract. However, certain factors must be taken into consideration. Those factors include whether:
- one of the parties has more power in the relationship;
- one party prepared the contract before speaking to the other side;
- the other party was required to either accept or reject the terms of the contract in the form in which they were presented;
- the other party had a genuine and real opportunity to negotiate the terms of the contract; and
- the terms of the contract take into account the circumstances of the transaction or other party.
If you are a small business, a standard form contract must not contain unfair contract terms if the other party is:
- a consumer; or
- a business, where either you or the other business employs less than 100 people or had less than $10 million in annual turnover in the previous income year.
For example, a clickwrap agreement to sell products to consumers and businesses on a website is a ‘standard form’ contract. The customer views the terms and conditions and accepts them via a tick-box, which states their acceptance, without the chance to negotiate the terms.
What Are Some Examples of Unfair Contract Terms?
There is no one definitive example of an unfair contract term. One term can be fair in one contract but unfair in another contract. The term is only fair or unfair depending on the context of the contract and the parties’ positions.
The Australian Consumer and Competition Commission (ACCC) has successfully taken businesses to court over unfair contract terms. They also negotiate with businesses to remove alleged unfair terms from contracts. Below, we discuss five terms that you should review when preparing your standard form contracts.
1. Automatic Renewal Clauses
The fairness of an automatic renewal clause can depend on the length of the renewal period specified in a contract. As a general rule, the longer the period of renewal, the more likely the clause will be seen as unfair. If the contract is only one month long with automatic renewal at the end of each month, then automatic renewal is unlikely to be unfair. For example, the ACCC ruled that Cardtronic’s automatic renewal period of six years made that particular clause unfair. Businesses with less cashflow may also be disadvantaged by the longer renewal period.
In addition, an automatic renewal term can be unfair if your customers cannot cancel the contract easily after the renewal takes place. For example, your customer does not choose to end the contract before the renewal time. The contract runs for another six months under the automatic renewal clause. Your customer is forced to pay a cancellation fee to terminate the contract. The automatic renewal term may be considered unfair. However, if they can cancel at any time without paying extra fees, it is unlikely that the clause would be unfair.
2. Unilateral Price Increases
If a party with more power can raise prices without considering the rights of the weaker party (known as a unilateral price increase), that could be an unfair contract term.
For example, a service provider increases the price of the services without giving the customer any prior notice. The customer cannot terminate without incurring a cancellation fee. The term is likely to be unfair, and there should be a right for the customer to terminate without paying extra cost.
Another example of unfair contract terms is when that term is combined with an automatic renewal clause. For example, in the ACCC’s case against Servcorp, the court found that it was unfair for a company to increase the price as the contract renewed itself automatically. Instead, they should have negotiated this case at the time of the contract’s extension.
3. Price-setting after the Contract is Signed
It is a potentially unfair contract term if one party is asked to sign and be bound by a contract when they do not know the price. For example, in the ACCC’s case against potato wholesaler Mitolo, the company only set the price of the potatoes once the farmers had harvested the potatoes. That was an unfair term because it gave the company too much power to pick a price that may not be fair for the potato farmers to pay.
The price is usually agreed upon in most contracts. As a business, if you sell a product to customers, you would pick a price that encourages them to enter into the contract. If both parties sign the contract without agreeing upon a firm price, you may end up choosing a much higher price than the buyer may be able to afford. The buyer would not have entered into the contract if they had known the price upfront. Therefore, to maintain transparency, you should ensure that your consumers know the relevant prices of the goods or services you offer.
4. Commentary Restrictions
A term may be unfair if the contract attempts to restrict commentary about your business.
For example, in the ACCC’s case against Wisdom, the home builder had a term that held customers responsible for any losses from public comments. The clause was to discourage customers from posting online reviews of the home builder’s services and, therefore, was considered unfair.
Your standard form contract should not restrict your customers from providing a fair and accurate review of your products or services, or control how they comment about your business.
5. Unfair Indemnity Clauses
You are also not allowed to have indemnity clauses that hold customers or other businesses responsible for losses out of their control. An indemnity clause is a common term in a contract where one party agrees to compensate the other party if there is harm or loss. Importantly, you should protect your interests and ensure the indemnity clause does not include losses the other party directly causes.
For example, the ACCC asked the Warnambool Cheese and Butter Factory (WCB) to amend indemnity terms that made farmers responsible for losses that WCB could avoid or mitigate. Asking your customers to provide you with an indemnity for any lack of care on your behalf would also be likely an unfair contract term.
Continue reading this article below the formWhat if Your Standard Form Contracts Have Unfair Contract Terms?
It is illegal to have unfair contract terms in your standard form contracts. The ACCC can ask your business to review and amend standard form contracts if they contain unfair terms. You may also face large fines for breaching unfair contract terms laws.
Another business can challenge your contract for unfair terms legally, such as before a tribunal or court. Those institutions have the power to declare an unfair term void. That means the unfair term will no longer operate in the contract.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
Key Takeaways
As a small business, you should check your standard form contracts to ensure that your terms do not include unfair contract terms. The context of the contract and the parties’ positions are two common factors that help decide whether a term is fair or unfair. The five terms that you should review when preparing your standard form contracts include:
- automatic renewal clauses;
- unilateral price increases;
- setting the price after the contract is signed;
- restricting commentary about a business; and
- unfair indemnity clauses.
If your business needs help with a contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 0808 258 4780 or visit our membership page.
Frequently Asked Questions
A term is considered unfair if it causes a significant imbalance in the parties’ rights and obligations, is not reasonably necessary to protect the legitimate interests of the advantaged party, and would cause detriment if relied upon. Only a court or tribunal can declare a term unfair.
If a court finds a contract term unfair, that term will be void and unenforceable—meaning it no longer operates in the contract, but the rest of the contract will still apply if it can function without it. Regulators may also take action against businesses with unfair terms.
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