Key points

  • The Federal Government has released draft legislation to prohibit unfair contract terms.
  • The proposed law will apply to all standard form contracts.
  • The proposed law will apply to both consumer and business to business transactions.

Australian consumer law – unfair contract terms

On 11 May 2009 the Federal Government released its exposure draft of the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Bill).

The Bill will amend both the Trade Practices Act 1974 and the Australian Securities and Investments Commission Act 2001 to prohibit the use of unfair contract terms in business and financial dealings.

The proposed law will apply to all standard form contracts used in dealing with consumers and businesses. Unless amended, the proposed law will have a significant impact upon almost all standard form contracts.

Unfair terms

Any standard form contract term which is unfair will be deemed void under the Bill. A term will be unfair if it:

  • causes a significant imbalance in the parties' rights and obligations
  • is not reasonably necessary in order to protect the legitimate interests of the party that benefits from the term.

The Bill reverses the onus of proof by deeming contract terms not to be reasonably necessary to protect the legitimate interests of the business, unless proved otherwise.

Certain matters are to be taken into account in considering whether a term is unfair including:

  • the extent to which, or whether there is a substantial likelihood that the term may cause detriment if relied upon
  • the extent of transparency in the term eg expressed in plain language and legible.

The Bill contains examples of unfair terms such as terms which allow only one party to limit liability, determine a breach, terminate, penalise the other party for a breach or termination, assign, or unilaterally vary certain terms of the contract.

Prohibited terms

Under the Bill the relevant Minister will also have power to prohibit by regulation certain contract terms.

The Minister is not constrained by any legislative criteria when exercising this intrusive power, nor is the Minister required to consult with the business community before promulgating regulations to prohibit specific contract terms.

The inclusion of a prohibited term within a standard form contract will contravene the Trade Practices Act, exposing the business to a pecuniary penalty.

Exceptions

Terms which define the main subject matter of the contract, set upfront prices or which are required or permitted by law are excluded from the operation of the Bill.

Timing

The Bill is planned to be introduced into Parliament in June 2009 and the provisions are expected to become effective from 1 January 2010.

Recommended action

All businesses which utilise standard form contracts should proceed to review the terms of their contracts to ensure compliance with the Bill.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.