Unfair Contract Terms – Protecting the Little Guy

19 February 2016

Small business owners will need to consider the enforceability of their business to business standard term contracts following the recent Commonwealth legislation amendment.

Are you a small business which employs fewer than 20 people? Do you transact with customers using a standard form contract? Do you deal with other companies which use standard form contracts? If you have answered yes to either of these questions then you may need to amend your trading terms or you may have cause to avoid your contract.

There is no need to panic as this new change will not take effect until 12 November 2016 but you should be taking steps now to ensure that your contracts do not fall foul of these provisions.

Who is caught by this amendment?

These protections will apply to contracts for the supply of goods or services which are signed (or agreed to) by a party which employs fewer than 20 people (determined by the total number of full-time, part-time and casual employees and contractors who work on a regular and systematic basis) and where the value of the contract does not exceed $300,000.00 or $1,000,000 where the contract is for more than one year.

The value of the contract is taken to be the ‘up front’ cost of the contract and does not take into account contingent costs which may or may not arise (i.e. interest).

When is a contract a standard form contract?

Standard form contracts are generally contracts which contain standardised, non-negotiated terms which are prepared by one party to the contract and are usually prepared so that the other is placed in a ‘take it or leave it’ position.

To determine whether your contract is a standard form contract you should consider whether:

the contract was prepared by one party without consultation with the other party;
one party was asked to either accept or reject the terms of the contract in the form which the contract was presented;
the terms were able to be negotiated;
one party has all of the bargaining power; and
the terms were tailored to the specific circumstances of the parties.

What is an unfair contract term?

Typically an unfair contract term is a term which:

would cause a significant imbalance in the parties’ rights and obligations under the contract;
are not reasonably necessary to protect the trader; and/or
would cause detriment (financial or otherwise) to the other party.

In determining whether a term is unfair, the court will consider the term in context of the entire contract. The court will give weight to the transparency of the contract, whether it is easy to read, whether it is up front or whether it is conveniently complex and confusing.

Examples of unfair contract terms

Here are some classic examples of unfair contract terms:

Terms which imposes excessive rates of interest on outstanding monies.
Terms which allow an automatic extension of the contract by one party only.
Where one party is permitted to change the terms of the contract without reference or notice to the other party.
Terms which impose excessive fees and charges not related to costs incurred.
Terms which limit a party’s remedies.
Terms which avoid liability for negligence or avoid responsibility when things go wrong.

Terms which permit only one party to terminate the contract.

What happens if a term is considered to be unfair?

If a court determines that a term in your contract is unfair the term will be treated as if it never existed. This may result in an obligation for the trader to refund the money, perform the services again or compensate the other party.

What should you do?

The most obvious solution is to review your terms to make sure that they do not contain unfair terms and if they do, amend your contract accordingly. You may also consider having two sets of contract terms. One for small businesses and one for other consumers.

As the court will review the contract as a whole and the surrounding context it is important that you also consider doing the following:

Redraft your terms in plain English so that they are easily readable, understandable and clear.
Amend your trading practices so that the format, payment terms and the process is clear.
Amend your website. This is often how you display your business to the outside world. Are your terms and conditions displayed clearly? Are your prices displayed properly? Are your contact details displayed prominently?

Trading Terms are an essential tool for every business. Ensure yours are compliant so you don’t get caught out.