Fair’s fair: the unfair contract terms regime

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By Andrew Egri, Lawyer

With courts now hearing the first claims under the expanded unfair contract laws which have been in force since 12 November 2016, it is a timely reminder to not-for-profit organisations to act fairly in their contractual relationships.

New application of unfair contract laws

A term can now be declared void by a court if it is:

  • in a contract regarding an interest in land or the supply of goods or services;
  • the contract is a ‘small business contract’ which is a ‘standard form contract’; and
  • unfair.

The expanded regime applies to contracts which are entered into after 12 November 2016. A contract entered into before 12 November 2016 is also covered by the expanded regime, if the contract is renewed or varied after that date.

What is a ‘small business contract’?

A ‘small business contract’ is a contract where:

  • at least one of the parties is a small business (which employs less than 20 people, including casual employees employed on a regular and systematic basis, as well as a not-for-profit organisation); and
  • the upfront price payable under the contract does not exceed $300,000 (or, if the contract term exceeds 12 months, $1,000,000).

What is a ‘standard form contract’?

A ‘standard form contract’ is one that has been prepared by one of the parties and is offered on a ‘take it or leave it’ basis.

A contract is less likely to be a standard form contract if negotiations occur prior to the preparation of the contract, or if the other party was given an effective opportunity to negotiate the terms of the contract prepared. Contracts that take into account the specific characteristic of another party or the particular transaction are also less likely to be standard form contracts.

What is an ‘unfair’ term?

A term of a small business contract is unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment to a party if it were to be relied on.

The law provides a sample of unfair contract terms, including those which permit only one party to:

  • terminate the contract;
  • vary the terms of the contract;
  • renew or not renew the contract;
  • determine whether there has been a breach of the contract; and
  • assign the contract without the consent of the other party.

The Sensis example

Earlier this year, in the first action taken under the expanded regime, the Australian Competition and Consumer Commission (ACCC) accepted a court-enforceable undertaking from Sensis.

Sensis had been representing to customers that its White Pages and Yellow Pages online packages and printed bundles had a minimum contract terms of 12 months and monthly fees. However, Sensis failed to disclose to potential customers that on expiry, the packages would renew automatically for an additional 12 month term. If this additional term was cancelled after a certain date, the customer would incur a cancellation fee equal to the cost of the remainder of the extended term.

As a result of the ACCC’s investigation, Sensis gave an undertaking to refund affected customers and to adequately explain to customers the terms of their automatic contract renewals and cancellation processes.

Following the Sensis investigation, the ACCC has made the new unfair contract terms laws an enforcement priority. ACCC Deputy Chair, Dr Michael Schaper, said that the ACCC “has serious concerns about the use of wide-ranging termination clauses that allow a business to unilaterally terminate a contract without reasonable cause.” Dr Schaper also warned that businesses which continue to use these termination clauses in their standard form contracts with small businesses risk ACCC enforcement action, including court proceedings to have those clauses declared unfair.

How are not-for-profit organisations affected?

Not-for-profit organisations that use standard form contracts should take the opportunity to review any standard form contracts to ensure that the terms contained would not be unfair. Any terms which are found by a court to be unfair are void and unenforceable, which may significantly impact a not-for-profit organisation’s standing.

Not-for-profit organisations which are ‘small businesses’ and are bound by or offered standard form contracts are also encouraged to review the terms of those contracts to identify potential unfair terms and consider raising them with the other parties. While the expanded application of the unfair contract laws provide additional protections to not-for-profit organisations, early identification of potential unfair terms is key, as going to court remains a costly exercise. In contract law, as always, prevention is better than cure.

For further information, please do not hesitate to contact us.

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