The new small business unfair contract terms legislation was passed on 12 November 2016. It extends the definitions of the current legislation so that unfair terms will also apply to small businesses as well as consumers. A court or tribunal under the new law can void any unfair term in a standard form contract. Given the integral nature of technology, many small businesses will come across an IT-related contract at some point in time. This article answers how will the unfair contract terms law affect the IT industry and the implications for companies and individuals in the IT sector.
IT Contracts and Unfair Terms
One of the key elements of the new legislation is that the contract in question must be a “standard form contract”. The law defines this as an unnegotiable contract which one party provides to the other.
Many of the contracts in the IT Industry fall into this category. Contracts such as IT Client Agreements, Managed Services Agreements and Reseller Agreements are all potentially standard form contracts if they are offered on a “take it or leave it” basis or contain standard or pro forma terms. However, the two most common agreements that will be affected are:
- End User Licence Agreements (also known as Software Licence Agreements); and
- Software as a Service Agreements.
Businesses commonly offer these contracts on a “click to accept” or “click-wrap” basis in which the business does not have a chance to negotiate.
Section 24 of the ACL contains an unfair contract term test and any term caught by this test will be unfair if:
- The term would cause a significant imbalance in the parties’ rights and obligations;
- The term is not reasonably necessary to protect the legitimate interests of the party benefitting from the term; and
- The term would cause detriment to a party if applied or followed.
There are exceptions and include those terms which:
- The law requires;
- Define the main subject of the contract; or
- Set the price.
Section 25 of the ACL provides a non-exhaustive list of examples. In considering IT contracts, the most relevant examples of terms which may be unfair include:
- Terms that only permit one party to terminate, vary, avoid or limit the performance of the contract;
- Terms that allow only one party to penalise the other for a breach or termination of the contract;
- Terms that allow one party to vary the price of the contract without the option for the other party to terminate.
Potentially Affected Terms
In practice, there are a few key clauses in IT contracts which may be caught by the unfair term test, as set out below.
Price variation clauses
Many contracts may include a term allowing the company or supplier of the product or service to vary the price at their discretion without including an express right for the customer to terminate the contract.
The court found in the case of Australian Communications and Media Authority v Bytecard Pty Ltd  FCA 38 that a term allowing Bytecard (an ISP provider) to vary the price for providing services without prior notice and a termination option was unfair.
Goods variation clauses
Contracts may also include terms that permit the supplier to vary the characteristics of the goods or services without notice to the customer. The ACL may consider these terms to be unfair as it gives the supplier a unilateral right of variation. Good variation clauses are particularly common in Software as a Service Agreements which often include mandatory upgrades.
It is key to note that the unfair terms test includes an element of detriment – provided the variation will not cause the customer detriment, it may be acceptable.
The ACL may consider terms which do not permit the customer to terminate the contract (as in the Bytecard case above) but allow the supplier to terminate for any breach at any time without notice to be unfair. In general, termination clauses should give equal rights to both the supplier and customer to terminate.
Excessive fee or penalty clauses
Clauses which penalise a customer for outstanding monies or late payments by imposing excessive fees or interest rates may be unfair. Further, early termination fees imposed on customers may also be unfair if it is excessive.
To avoid being considered excessive, the supplier must be able to show that the fees are:
- A genuine estimate of losses if a customer terminates the contract; and
- Must take into account the costs saved by the supplier in not being required to deliver the service.
Broad indemnity clauses
Most contracts include indemnity clauses where the customer indemnifies the supplier of loss or harm that is the fault of the customer. However, indemnities which are too broad can be unfair. Broad indemnities clauses which require the customer to indemnify the supplier of all loss or harm, including those caused by the supplier itself, will be unfair.
The new legislation has particularly significant implications for developer and software supplier companies in the IT industry. The nature of the provision of technology-related services, particularly software as a service or end user licences, are that the customer is often only given the option to click accept to use the services or product. The business usually supplies the same contract to hundreds of customers, and this makes these contracts easily susceptible to being unfair.
For suppliers of IT products and services, a review of contracts may be useful in identifying any terms which can potentially be unfair. Suppliers should look to either amend or remove these terms as a solution. Amendment or removal will prevent potential unfair contract claims by small businesses and customers in the future.
For customers and end users, it is important to understand better the protection that the new unfair contracts reform will afford to small businesses.
If you have any questions or need assistance reviewing your contracts to ensure they are compliant with the new law, get in touch with our contract lawyers on 1300 544 755.