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As a business owner, you probably enter into new contracts all the time. Contracts are crucial in governing the relationship between your business and third parties. But, it is essential to consider whether the terms of your contract are fair. As Australian potato wholesaler, Mitolo Group, recently discovered, the Australian Competition and Consumer Commission (ACCC) holds businesses accountable for unfair contract terms. This article outlines some essential lessons from the Mitolo case regarding unfair contracts.

The Fundamental Rules on Unfair Contract Terms

The Australian Consumer Law (ACL) affords protections to both consumers and small businesses, especially concerning unfair contract terms. The ACL sets out that a term of a small business contract will not be legally binding if the:

  • clause is unfair; and
  • contract is a standard form contract.

What Is a Small Business Contract?

A contract will be a small business contract if:

  • it is for the supply of goods, services, or a sale of land;
  • at the time the contract is entered into, at least one party is a small business with fewer than 20 employees; and
  • the upfront price under the contract does not exceed $300,000, or $1,000,000 if the contrct has a duration of over a year.

What Is a Standard Form Contract?

A standard form contract is where one party has much or all of the bargaining power for the transaction.

For example, the terms and conditions that you accept when signing up to a website will likely be a standard form contract. This is because you have no ability to negotiate the terms and conditions with the other company.

There are a number of other factors which will also determine whether an agreement is a standard form contract. These include whether:

  • the contract was prepared before discussions of the transaction between the parties;
  • one party was required to accept or reject the contract;
  • the party receiving the contract had any real opportunity to negotiate it; and
  • the terms of the contract take into consideration the specifics of the transaction.

When is a Term Unfair?

Contracts will inevitably contain strict clauses. Strict clauses ensure clarity for both parties about their:

  • relationship;
  • rights;
  • obligations; and 
  • expectations.

However, it is crucial that the terms of your contracts are not so strict that they are unfair to other businesses. Under the ACL, a term in a standard form small business contract will be unfair if it:

  • would cause a significant imbalance in the rights and obligations of you and the other party;
  • is not reasonably necessary to protect your legitimate business interests; and
  • would cause detriment to the other party if they were bound to the contract.

Examples of the kinds of terms that may be unfair are terms that:

  • permit one party (but not another party) to limit their obligations under the contract;
  • permit one party (but not another party) to terminate the contract;
  • penalise one party (but not another party) for breaching or terminating the contract; and
  • permit one party (but not another party) to vary the terms of the contract.

Mitolo Group’s Unfair Terms

Mitolo Group is Australia’s largest potato wholesaler. Their operations span 4,000 acres in South Australia and western Victoria. They also operate two major potato processing lines with a daily packing capacity of 500 tonnes. However, in proceedings started by the ACCC, the Federal Court declared that certain terms of the standard form contracts that Mitolo Group used were unfair and therefore void.

Mitolo’s standard form contracts with potato farmers gave them a lot more power than the farmers.

For example, the terms allowed Mitolo to determine or change the price that they paid farmers for potatoes. The farmers did not have a say in the rates they were paid. 

Mitolo also had the opportunity to change other terms of the contract, while the farmers did not enjoy the same liberties. 

Further, in the absence of a proper mechanism to review the potatoes, Mitolo could declare potatoes as “wastage” under the contract. Mitolo could also prevent farmers from selling potatoes to any other parties.

Consequences for Mitolo Group

Mitolo Group was fined $240,000 for regulatory infringements related to the unfair contracts with potato farmers. The ACCC struck out all the unfair terms, making them unenforceable. In addition to the fine and orders made, Mitolo Group had to promise the ACCC that they will work with farmers under a revised contract. The revised contract provides farmers with greater certainty on pricing and also allows farmers to sell potatoes to other companies.

Key Takeaways

If your contract contains unfair terms, you are in breach of the ACL and could face proceedings from the ACCC. To ensure that your contract terms are fair, you must ensure that they do not place harsh obligations on the other party while affording you liberties they do not have. If you need assistance with reviewing a contract to ensure you are drafting in line with the ACL, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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