What makes a contract term “unfair”?

This is the third 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 second bulletin include the following:

• the “unfair contract terms” legislation only applies to contracts that are both a “small business contract” and a “standard form contract”;
• a small business contract is one where the contract is for the supply of goods or services, at least one of the parties to the contract is a ‘small business’, and the upfront price payable under the contract does not exceed either $300,000 or (if the contract has a duration of more than 12 months) $1,000,000; and
• a standard form contract is one that is offered on a ‘take it or leave it’ basis (such as those often used by the gym industry).

Now that we’ve considered what contracts are small business standard form contracts (and are therefore affected by the unfair contract terms legislation) we will now turn our attention to what makes a term in such a contract ‘unfair’.

What makes a term ‘unfair’?

A term in a small business standard form contract is ‘unfair’ if the term meets all of the following criteria:

• the term would cause a significant imbalance in the parties’ rights and obligations under the contract; and
• the term is not necessary in order to protect the party benefitting from the term; and
• the term would cause disadvantage, loss, or harm (whether financial or otherwise) to a party if it were relied on.

The relevant law actually sets out many examples of unfair terms, such as:

1. a term that permits one party (but not another) to terminate the contract;
2. a term that permits one party (but not another) to vary the terms of the contract; and
3. a term that limits one party’s (but not another’s) right to sue another party.

Whether or not a term is ‘unfair’ will also depend on how “transparent” the term is. We will consider what “transparent” means in relation to unfair terms in an upcoming bulletin.

ACCC v JJ Richards

To give you a ‘real world’ idea of what unfair terms look like, it is worthwhile briefly considering the case of ACCC v JJ Richards.

JJ Richards & Sons provides commercial and domestic waste management services.

The Federal Court of Australia decided in late 2017 that eight of the terms in JJ Richards’ small business standard form contract were unfair contract terms. This means that each of the eight terms met all three criteria for an unfair term as listed above.

Those eight unfair terms included the following:

• a term that allowed JJ Richards to, without consulting the customer, increase the price of its services for any reason;
• a term that restricted the JJ Richards’ customer by requiring them to obtain all of their waste management services from JJ Richards, even if the customer sought services beyond those provided by JJ Richards; and
• a term that allowed JJ Richards to put its services on hold, but continue charging the customer if the customer did not pay their account within 7 days.

You will notice that the common thread between these terms is that they all blatantly advantaged JJ Richards at the expense of the customer.

So what does this all mean?

Sometimes, an unfair term in a small business standard form contract will be quite easy to spot because of how obviously a party is advantaged and another party disadvantaged. On other occasions though, where for instance a term is lengthy and quite complex, identifying whether or not the term is ‘unfair’ may be a more difficult task.

Therefore, whether you are concerned about being on the receiving end of an unfair term, or concerned that terms in the small business standard form contracts that you rely on may be considered unfair, it is worthwhile asking yourself the following basic ‘diagnostic’ questions:

• does the term go beyond what is necessary for the transaction?
• is a party disadvantaged by the term?
• does the term give one party rights that are not given to other parties?

If you answered ‘yes’ to any of the above questions, the term is not necessarily unfair. However, it may be prudent of you to have a legal professional review the contract in question.

As they say, prevention is better than cure; what may be a slight inconvenience now to have the small business standard form contracts that you are a party to reviewed could save your business a lot of trouble later on.

Stay tuned for our next bulletin, where we will consider another case that helps illustrate what an unfair term looks like.

View First Contract Bulletin

View Second Contract Bulletin