Under the Australian Consumer Law (ACL), small businesses are protected from unfair contract terms. Small businesses may often lack bargaining power, which might ordinarily allow a larger business to include clauses that unfairly disadvantage the small business. However, the unfair contract terms (UCT) regime steps in to address this unbalance. This article will give an overview of the unfair contract terms regime by:

  • explaining standard form contracts;
  • providing examples of unfair contract terms; and
  • addressing the upcoming changes to the UCT regime (which will widen the gambit of the regime).

What is the Unfair Contract Terms Regime?

There is a lot to break down within the unfair contract terms regime. The law applies to 'standard form contracts' entered from 12 November 2016, where:

  1. the contract is for the supply of goods or services, or the sale of an interest in land; and
  2. at least one of the parties is a small business (a business that employs less than 20 people); and
  3. the upfront price payable under the contract does not exceed $300,000 (or, if the contract is for more than 12 months, the upfront price payable does not exceed $1,000,000).

If a court or tribunal considers a clause is an 'unfair contract term', the relevant term becomes void and unenforceable. However, the remainder of the contract continues to operate.

A number of changes are being made to the UCT regime in 2021, and we will address these upcoming changes in this article.

Standard Form Contracts

A standard form contract is a contract between two parties, where one party does not have the ability to negotiate the terms. Although the ACL does not specifically define 'standard form', it does provide a framework of factors for courts to consider when determining whether a standard form contract exists. These factors include where the:

  • bargaining power is possessed by one party;
  • contract is prepared without discussion between the parties;
  • other party must accept or reject terms on a 'take it or leave it basis'; or
  • other party was not given an effective opportunity to negotiate the terms of the contract.

Recognisable examples of standard form contracts include:

  • mobile phone plans;
  • airline sales terms and conditions;
  • gym memberships;
  • information technology licenses; and
  • online contracts where the party is required to tick an acceptance box to accept terms and conditions.

Factors of Unfair Contract Terms

The Australian Competition and Consumer Commission (ACCC), which works to make sure the ACL is enforced, has provided plenty of guidance on examples of unfair contract terms.

An unfair term is one that:

  • 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 benefiting from the term; and
  • would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.

Each of these three factors must be present for a term to be unfair.

Examples of Unfair Contract Terms

Examples of unfair contract terms are set out in the table below.

Example Explanation How to avoid this unfair term
Unilateral Variation Unilateral variation is where only one party can vary the contract. Providers should give notice of any upcoming changes to the terms (particularly changes that would or could be detrimental to the customer). Customers must be able to terminate the contract without paying any additional fees.
Hair-Trigger Termination Allowing one party to terminate for breach of the contract, but not the other. Firstly, the contract should include grounds for termination. Secondly, both parties should be given the opportunity to terminate for breach. Thirdly, the party should be given a chance to fix the breach before the other party can terminate.
Early Termination Fees Early termination fees will be unfair where they are excessive. These fees should be a genuine pre-estimate of the loss the provider believes they will suffer as a result of the customer's early termination. They should also take into account the costs saved by the provider in no longer needing to provide the services after the early termination.
Automatic Renewal

Where the contract automatically renews:

  • before a party has a chance to opt-out;
  • where the party has not been notified that the contract is renewing;
  • where the provider can change the cut-off date for the renewal; or
  • where the customer will incur expensive fees if they cancel after the contract has automatically renewed.

The provider should adequately disclose the renewal date in the contract. They should also ensure the cut-off date for cancelling the renewal is clear and not subject to unilateral change by the provider.

Otherwise, the customer can cancel the contract after the initial term without being required to pay damages or additional fees to exit.
Limited Liability Parties may not excessively limit their liability under the contract. The contract should state that any limitation of liability does not limit a customer's rights under the ACL.
Misleading Statements About Rights at Law The contract should not include statements that mislead or confuse customers about their rights at law. The ACL provides mandatory wording to include when expressing customers' rights under the ACL, in particular where the provider is providing warranties against defects.

Upcoming Changes to the Unfair Contract Terms Regime

The UCT regime is evolving to protect even more businesses. There are a number of changes that will soon be implemented in 2021 to the unfair contract terms regime:

  • in particular, while unfair contract terms may be deemed void and unenforceable, under the proposed changes, unfair contract terms will be illegal.
  • the 'small business' threshold is changing. When the new changes are implemented, a business falls into the threshold if it has fewer than 100 employees, OR it has an annual turnover of less than $10 million. Currently, a small business must have fewer than 20 employees, and, for the regime to apply, there is a cap of $300,000 on the price payable under the contract (unless the contract is for longer than 12 months, in which case this cap is $1 million). However, soon, there will be no upfront price requirement, so as long as the business has fewer than 100 employees and has an annual turnover of less than $10 million, it will meet the small business threshold; and
  • under the new law, the ACL will also provide more clarity on what constitutes a 'standard form contract'.

Key Takeaways

Whether you are a small business or a larger business, it is important to understand how the unfair contract terms regime works. Particularly as the law is being revised and even more businesses will be captured by the regime. Additionally, larger companies who deal with small businesses need to know what contract terms are permissible and what contract terms are at risk of being viewed as unfair.