As a business owner, you probably enter into contracts every day. Contracts are crucial as they document and govern the relationship between your business and various parties. It is common to offer the same or similar contracts to the parties you interact with. These are examples of a standard form contract.
While standard form contracts assist business efficiency, it is essential to consider the contract terms and determine whether or not they are fair. This article explores unfair terms in standard form contracts, including how to identify and avoid them.
What is a Standard Form Contract?
Before considering unfair terms, it is important to understand what constitutes a standard form contract. There is no statutory definition for a standard form contract. However, certain factors must be taken into consideration. Those factors include whether:
- one of the parties has all, or most of, the bargaining power in the transaction;
- one party prepared the contract before any discussion between the parties about the transaction occurred;
- the other party needed to either accept or reject the contract terms as they were presented;
- another party had the 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.
A contract is a standard form if:
- it is for the supply of goods, services, or land;
- one (or both) of the parties is a small business with fewer than 20 employees; and
- the contract price is not over $300,000 (or $1 million if the contract is for more than one year).
A standard form contract may also be known as a:
- boilerplate contract;
- contract of adhesion; or
- take-it-or-leave-it contract.
Although these names differ, the types of clauses determine if the contract is a standard form.
ACCC v JJ Richard & Sons Pty Ltd
For a long time, the Australian Competition and Consumer Commission (ACCC) has been clamping down on unfair contract terms imposed on consumers by bigger businesses. The Australian Consumer Law (ACL) has recently broadened that scope to include small business contracts.
In late 2017, the ACCC brought a case against JJ Richard & Sons Pty Ltd. They found some overly strict terms in JJ Richard’s standard contract. Those terms allowed the company to increase prices, change the scope of work, and prohibit customers from ending the contract in certain circumstances. The ACCC argued that the standard contracts gave JJ Richard too much freedom and imposed too many restrictions on small businesses.
Continue reading this article below the formWhat is an Unfair Term?
These include strict clauses, whether you are on a contract’s giving or receiving end. The ACCC wishes to ensure contract terms are as clear as possible about the parties’ relationship, rights, obligations, and expectations. However, these strict terms may, in some circumstances, be unfair. According to the ACCC, unfair contract terms will:
- let only one party avoid their obligations under the contract;
- allow only one party to end the contract;
- punish only one party for breaching any terms; and
- enable only one party to change the contract.
Ultimately, a contract will have unfair terms if it is overly restrictive on one party and provides the other with too many liberties. You should not impose unfair terms in standard form contracts onto other parties. Nor should you accept unfair terms. Courts will not accept unfair clauses, place harsh obligations on the business or are otherwise unreasonable.
Upcoming Changes to the Unfair Contract Terms Regime
In light of all the information above, it is important to note that changes are soon coming into effect, which means that the unfair contract terms regime will apply to even more businesses.
The definition of a “small business contract” will apply where a business employs fewer than 100 employees (including any regular casual) or has less than $100M annual turnover in the previous income year.
Another significant change to the regime involves penalties. The new maximum penalties will apply to each contravention a business commits. Your business may be fined the greater of $50M (previously $10M), 3 times the value of the benefit (if the courts can determine this), or 30% of the adjusted turnover during the period of the breach, or the previous 12 months (whichever is longer). The maximum penalty for individuals involved in the conduct will be $2.5M (previously $500K).
Lastly, the updates provide greater clarity around when a contract is ‘standard form’ by listing factors the Court should disregard. These include whether a party has negotiated minor changes, whether a party can select from a pre-determined range of terms, or whether a party to another similar contract has been given a chance to negotiate the contract.
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Key Takeaways
Contracts are an essential part of conducting business. Ensuring that they contain fair terms and conditions for other parties is vital. There is a delicate balance between protecting your business and taking advantage of other parties. The issue of unfair contract terms is one of which to be especially aware of if your company uses standard contract forms. Therefore, it is best practice to have a lawyer review your standard form contract to determine whether any terms are unfair or unreasonable.
If you need assistance drafting or reviewing a standard form 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 to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Changes to the unfair contract term regime will take effect on 9 November 2023.
A contract term is likely unfair if it overly restricts one party and gives the other too many liberties.
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