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Consider the following scenarios:
You enter into a long-term contract with a supplier for a product and hidden in the fine print are terms which give them the right to unilaterally vary the terms of the contract such as how or when payments are to be made
You agree to install a product to improve an outdoor entertainment area however, you insert a clause enabling you to suspend service without cause. That way, you can secure a more valuable job should it arise.
These terms on the face of it may be unfair.
The above scenarios potentially contain unfair terms. A key question relevant to protecting your business interests is whether you (or parties you enter into contracts with) can rely on such terms to enforce these contractual ‘rights’ in practice.
Unfair contract term provisions - What types of contracts are captured by the law?
Most relevant is that the contract must be a ‘small business contract’. A small business contract is one which for all relevant purposes:
the contract is for a supply of goods or services, and
when the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons (excluding casual employees not employed on a regular and systematic basis); and
either of the following applies:
the upfront price payable under the contract does not exceed $300,000;
The contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
Standard form contracts
This law applies to ‘standard form contracts’ that are entered into, varied on or after, or renewed on or after 12 November 2016.
A standard form contract is one that has been prepared by one party to the contract and where the other party has little or no prospect to negotiate the contract terms. Further, such kind of contract is generally offered on a “take it or leave it” basis.
In determining whether parties have entered into a standard form contract one must consider whether:
one of the parties has all or most of the bargaining power relating to the transaction;
the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
whether another party was, in effect, required either to accept or reject the terms of the contract;
whether another party was given an opportunity to negotiate the terms; and
Whether the terms of the contract consider the specific characteristics of another party or the particular transaction.[1]
There is a presumption that a contract is a standard form contract unless it is proved otherwise.
What are ‘unfair’ terms?
In determining whether a clause of the contract is unfair, the Courts will generally apply a three-limbed test for unfairness.
This test states that the term would be unfair if (on the balance of probabilities) it:
would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
would cause detriment (whether financial or otherwise) to a party if it was to be applied or relied on.
The effect of having an unfair term
Unfair contractual terms in these above circumstances would be void, meaning that they are unenforceable on the parties. The rest of the contract can continue on foot to the extent that it is capable of operating without the unfair term.
It is worth noting that terms which define the main subject matter of the contract or sets the upfront price payable under the contract or is a term required, or expressly permitted, by the law generally cannot be deemed ‘unfair’.
Examples of unfair terms
It is important to highlight that the unfair contract terms provisions do not apply to contracts entered into before 12 November 2016 (unless renewed on or after this date).
The ACCC acknowledges certain contractual terms as unfair:
Terms that enable one party (but not another) to avoid or limit their obligations under the contract.
Terms that enable one party (but not another) to terminate the contract.
Terms that enable one party (but not another) to vary the terms of the contract.
Terms that penalise one party (but not another) for breaching or terminating the contract.
Terms that define the main subject matter of the contract and terms that set the upfront price payable are not considered to be unfair.
In October 2017, the ACCC challenged standard form waste management contracts provided to small businesses by a company called Richards & Sons Pty Ltd. A price variation term allowed JJ Richards to unilaterally increase the price of its services for any reason. The ACCC claimed that a unilateral variation term allowed Servcorp a right to vary the prices it charged small businesses to hire shared office space. These cases highlight those terms which allow one party to vary an upfront price payable may be unfair and void.
Other terms that had the effect of:
· binding customers to subsequent contracts unless they cancel the contract within 30 days before the end of the term
· removing any liability for JJ Richards where its performance is “prevented or hindered in any way”
· allowing JJ Richards to charge customers for services not rendered even when caused by reasons beyond the customer’s control
· granting JJ Richards exclusive rights to remove waste from a customer’s premises
· allowing JJ Richards to suspend its service but continue to charge the customer if payment is not made after seven days
· creating an unlimited indemnity in favour of JJ Richards
· preventing customers from terminating their contracts if they have payments outstanding and entitling JJ Richards to continue charging customers equipment rental after the termination of the contract.
It is ultimately up to a court or tribunal to decide if a contractual term is unfair.
What steps should you take to avoid signing an unfair contract?
Before signing a contract, you should carefully read through its terms and understand what you are signing.
If you suspect that a term in your contract is unfair, you can let the other party know your concerns and ask them to amend it.
Due to the complicated nature of this area of law, you can also speak to a lawyer for legal advice about the unfair terms. The lawyer will help you make sure the terms in a standard form contract are actually enforceable.
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