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Identify an ‘unfair term’

22 November 2018

This is the fourth bulletin in an ongoing series that looks at how the recent “unfair contract terms” legislation can affect your business.

You Can Protect Your Business From Unfair Contracts

The takeaways from our third bulletin include the following:

  • in order for a term to be considered ‘unfair’, it must meet three criteria; essentially, the term must cause a significant imbalance between the parties, and be unnecessary for the protection of the party it benefits, and cause disadvantage if it were relied upon; and
  • an example of an ‘unfair’ term provided by the relevant legislation is a term that permits one party (but not another) to terminate the contract in question.

Identify an ‘unfair term’

It goes without saying that being able to identify a term that is unfair (and therefore illegal) is crucial to ensuring you’re on the right side of the unfair contracts term legislation. That is, being able to identify an ‘unfair term’ will allow you to take appropriate action and:

  • avoid adverse consequences arising from having unfair terms in your contracts; and
  • help you steer clear from contracts that are disadvantageous to you because they contain unfair terms.

For these reasons, we will now look at another real life example of what constitutes an ‘unfair term’.

Sensis Pty Ltd

You might still have a hard-copy Yellow Pages book lying around at home or in the office. Amongst other things, Sensis provides advertising services to businesses via the Yellow Pages and also the White Pages.

The relevant national regulator, the Australian Competition & Consumer Commission (“ACCC”), investigated Sensis’ standard form small business contracts after receiving a large number of complaints from Sensis’ small business customers.

The standard form small business contracts in question related to Sensis’ Yellow Pages and White Pages ‘bundled packages’ (“Package Contracts”), which had a monthly fee with a 12-month minimum contract period.

The ACCC raised concerns that the following terms in Sensis’ Package Contracts were unfair (“Sensis’ Unfair Terms”):

  1. a term that meant the Package Contract automatically renewed for a further 12 months unless cancelled by the customer (this term was not disclosed to customers either before or after the contracts were entered into);
  2. a term that allowed Sensis to charge a cancellation fee equal to the remaining cost of the Package Contract if the customer cancelled an automatically renewed Package Contract after a certain date (“the Cancellation Fee Term”); and
  3. a term that allowed Sensis to terminate a Package Contract “without cause” (“the Without Cause Term”).

In light of the ACCC’s concerns, Sensis agreed to make the following changes to Sensis’ Unfair Terms:

  • make the terms relating to the Package Contract’s automatic renewal more transparent (a concept we will explore in our next bulletin);
  • include an obligation on Sensis to remind customers whenever a Package Contract was nearing the end of its 12-month period and about to be automatically renewed; and
  • limit Sensis’ right to terminate a customer’s Package Contract to circumstances where Sensis is “acting reasonably” and with the purpose of protecting its legitimate interests.

So what does this all mean?

With respect to the terms themselves, one can appreciate how each of Sensis’ Unfair Terms were capable of meeting all three criteria for an ‘unfair term’. Looking at some of the criteria more specifically however, the Cancellation Fee Term for example is quite clearly unnecessary for the protection of Sensis’ interests. Meanwhile, the Without Cause Term quite blatantly causes a significant imbalance between Sensis’ rights and its customer’s.

Furthermore, it is telling that what caused Sensis to change the terms in its Package Contracts was not legal proceedings, but simply complaints by customers to the ACCC (albeit a large number of them). It seems that the stigma and reputational risk that comes with being potentially in breach of the relevant legislation, at the expense of small businesses, is enough to convince large businesses such as Sensis to accept the ACCC’s concerns and toe the line.

As mentioned in our previous bulletin, we recommend that if you have concerns about unfair terms in small business contracts that you have not prepared but are a party to, it would be prudent of you to have a legal professional review the contract in question.

With respect to small business contracts that you actually prepare however, ideally you ought to have these terms reviewed as they are being formulated so that any potential ‘unfair’ terms are nipped in the bud.

Stay tuned for our next bulletin, where we will consider what it means for a term in a small business contract to be transparent.

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