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5 Key Examples of Unfair Contract Terms

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If you are a small business, the Australian Consumer Law’s unfair contract terms provisions will apply to you. The provisions aims 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 any contractual terms do not violate the provisions. This article explains 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 applies to consumer contracts and small business contracts that are a standard form contract.

A standard form contract is a contract that is:

  • prepared by one side before they speak with the other side;
  • prepared by the side with the most power in the relationship (such as the seller of products); and
  • not usually negotiated before signing.

For small businesses, a standard form contract must not contain unfair contract terms if it covers parties that are either:

  • a business and a consumer; or
  • between two businesses, where one of the businesses employs less than 20 people and the upfront price of the contract is not more than $3 million or $1 million for contracts which extend over more than 1 year.  

The Australian Consumer Law’s unfair terms provisions only apply to standard form contracts. 

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.

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 party’s 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. Here are five terms that you should review when preparing your standard form contracts. 

1. Automatic Renewal Clauses

The fairness of an automatic renewal clauses depends on the length of the renewal period specified in a contract. 

If the contract is only one month long with automatic renewal at the end of each month, then automatic renewal is fine. However, if the automatic renewal period is excessively long, that may be construed as ‘unfair’. 

For example, the ACCC ruled that Cardtronic’s automatic renewal period of six years made that particular clause unfair. The longer the period of renewal, the more likely the clause will be seen as unfair. Businesses with less cashflow may 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 terminate 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 is likely to be unfair. However, if they can cancel anytime without paying extra fees, it is unlikely for them to 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. There should be a right for the customer to terminate without paying extra cost. 

Another example of the 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. Setting the Price 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 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 to the potato farmers to pay.

The price is usually agreed upon in most contracts. The seller has to pick a price that would encourage the other party to enter into the contract. If both parties sign the contract without agreeing upon a firm price, the seller can pick a much higher price that the buyer may not be able to afford. The buyer would not have entered into the contract if they had known the price upfront. 

4. Restricting Commentary About a Business

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. That term was found to be 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 holds customers or other businesses responsible for losses out of their control. 

An indemnity clause is a common provision in a contract where one party agrees to compensate the other party if there is harm or loss.

Your indemnity clauses should usually be restricted to losses that are directly caused by the other party.

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 negligence that you cause would also be a potentially unfair contract term. 

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What if Your Standard Form Contracts Have Unfair Contract Terms?

The ACCC can ask your business to review and amend standard form contracts if they contain unfair terms. However, at present, they cannot impose fines on your business. However, this situation may change in the near future if the federal government adopts the ACCC’s suggestion to be given this power. 

Another business can challenge your contract for unfair terms 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.

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 party’s 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:

  1. automatic renewal clauses;
  2. unilateral price increases;
  3. setting the price after the contract is signed;
  4. restricting commentary about a business; and
  5. unfair indemnity clauses.

If you have any questions or if you want to review your contracts for unfair contract terms, get in touch with LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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