A term of a consumer contract will be void if the term is unfair and the contract is a standard form contract. The Australian Consumer Law, which falls under the Competition and Consumer Act 2010 (Cth) (Act), protects consumers from unfair contracts. The law applies only to consumer contracts and some business contracts where:

  • one party to the contract is a small business; and 
  • the contract has a low value.

A term in a consumer contract is unfair if:

  • it causes a significant imbalance in the parties’ rights and obligations; and
  • is not reasonably necessary in protecting the legitimate interests of the party who the term advantages.

If a term unfair, it will be void. This means that it is not binding. Speak with a commercial solicitor if you believe you are the victim of an unfair contract term.

When Do Unfair Contract Term Provisions Apply?

The law of unfair contract terms applies to standard form contracts entered into or renewed on or after the 12 November 2016. It applies where: 

  • the contract is for the supply of goods or services or the sale of an interest in land; 
  • at least one of the parties is a small business (employs less than 20 people); and  
  • the upfront price payable under the contract is no more than $300,000 or $1 million if the contract term is for more than 12 months. 

The unfair contract term laws exclude certain contracts. These are:

  • contracts entered into before 12 November 2016; 
  • shipping contracts; 
  • company constitutions or managed investment schemes; and 
  • certain insurance contracts. 

Similarly, the Act does not cover some specific terms. These include:

  • terms which define the main subject matter of the contract;
  • terms that set the upfront price payable under the contract; or
  • any terms which Commonwealth, state or territory laws require or permit.

Meaning of Unfair Contract Term

A term in a standard form contract is unfair if it falls under one of the three subsections in the Act:

  1. it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  2. it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  3. it would cause detriment (whether financial or otherwise) to a party if they were to apply it or rely on it.

The above points may help you recognise a potentially unfair contract term, but ultimately, it is only a court or tribunal that can decide that a term is unfair. 

Significant Imbalance

In determining whether a contract has a significant imbalance to one party, a court will examine the extent that the term is transparent. Here, they will also consider the contract as a whole.

Examples of Unfair Contracts

Terms that are unfair include terms that:

  • allow the business to vary the contract but not the consumer;
  • allow the business to change the price without giving the consumer a choice to end the contract;
  • permit the business to change the goods or services supplied without giving the consumer a choice to end the contract; and
  • permit, or has the effect of permitting, one party (but not another party) to terminate the contract, avoid or limit the performance of the contract, vary the terms of the contract, or renew or not renew the contract.

Threshold

When determining if a term of a contract is unfair, the courts will assess the contract as a whole. The fairness of a particular contractual term cannot be considered in isolation but must be assessed in light of the entire contract. Terms that may present as being unfair in one context may be considered fair in another context, and this is why courts have to consider the entire contract when making this decision. 

What Happens if a Contract Term is Unfair?

If a contract term is deemed unfair by a court, the contract term will be void. The entire contract will continue to bind the parties if it is capable of operating without the unfair term. Enforcement of the unfair contract terms is shared between:

  • the ACCC;
  • ASIC; and
  • state and territory consumer protection agencies.

Standard Form Contract

A standard form contract is a contract that has been prepared by one party and where the other party has little or no ability to negotiate the terms of the contract. These contracts are often the same or very similar and are offered to consumers on a ‘take it or leave it’ basis. 

Consumers who are party to a standard form contract are protected against unfair contract terms. Examples of common standard-form contracts are:

  • mobile phone contracts;
  • gym memberships;
  • airline tickets;
  • concert tickets; and
  • utilities.

A consumer contract is presumed to be a standard form contract unless the business relying on the term proves otherwise.

Key Takeaways

There are three things that the court will consider when determining whether a contract is unfair. These are whether:

  • there is a significant imbalance, 
  • the term was reasonably necessary to protect legitimate interests, and 
  • the term would cause detriment. 

Ultimately, it is only a court or tribunal that can decide that a contract term is unfair. It is nevertheless helpful to have an understanding of unfair contract terms, so you are able to recognise a potentially unfair term and take action. 

Standard form contracts are entered into all the time, and the law protects consumers by offering considerable protection against unfair terms. If you are a consumer or a small business and you are uncomfortable with a particular term in a contract that you are entering into, you should speak to a specialist commercial contracts lawyer. Contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page to find out more about unfair contract terms and whether your business’ contract is exempt or not.

Frequently Asked Questions about Unfair Contracts

Q: What determines if a contract is transparent?

A: The term must be expressed in reasonably plain language, legible, presented clearly, and readily available to any party affected by the term.

Q: Are insurance contracts a standard form contract?

A: Insurance contracts are currently exempt from unfair contracts laws. Moreover, contracts for financial products and financial services are not covered.

Q: What happens if a contract term is declared void?

A: The particular term will be considered void from its inception. If the other party to the contract attempts to enforce the term after a declaration is made, then the Act provides that the party to the consumer contract can seek an injunction preventing the other party from attempting to enforce the unfair term.

Q: What happens if I signed a contract before 12 November 2016 before the new laws came into effect?

A: The law covering unfair contracts terms will only apply to contracts entered into or varied after 12 November 2016. However, if the contract was renewed or varied afterwards, the new provisions will apply.

 

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