A guide to unenforceable contract terms

Many contracts contain unenforceable contract terms. These terms are often illegal or prohibited by statute. These clauses are invalid and unenforceable in court. Because of this, unenforceable contract terms can cause significant problems for parties seeking to enforce the contract.

In this article, Farrah Motley, a commercial contract lawyer writes about common contract terms that are considered to be unenforceable in Australia.

Use of ‘commercially reasonable’

The phrase “commercially reasonable” is commonly used in contracts to describe an action that is considered to be fair and reasonable in the commercial context. However, in Australia, the term is generally considered to be unenforceable. The court considers it vague since it can be interpreted in many different ways.

Moreover, courts in Australia have consistently held “commercially reasonable” is too uncertain to be enforceable. The term does not provide a clear and objective standard by which the parties can be held accountable. Instead, courts may look into specific circumstances of the case and applicable laws to determine what is reasonable and fair.

Example

A contract states a party to make “commercially reasonable efforts” to complete a project by a certain deadline. In such a case, the term “commercially reasonable” would not be sufficient to determine what level of effort is required. Instead, the court would consider the following factors:

• the nature of the project,
• the resources available to the party, and
• any external factors that may affect the completion of the project.

Commercial contract lawyers can help you draft clear and concise contractual terms, avoiding the use of vague terms such as “commercially reasonable.” Moreover, they can advise you on the enforceability of terms and assist in negotiation to make them clear and enforceable.

Terms that conflict with the mandatory consumer guarantees in the Australian Consumer Law

The Australian Consumer Law (ACL) sets out mandatory consumer guarantees that apply to goods and services that businesses sell to consumers.

These guarantees cannot be excluded, modified or limited by contract terms. Moreover, any terms that conflict with the mandatory consumer guarantees are considered unenforceable under Australian law.

Examples of clauses contrary to the Australian Consumer Law

If you sell a faulty product to a consumer, the consumer has the right to a repair, replacement or refund under the consumer guarantees. However, if you attempt to limit this right by including a clause in the contract that says the consumer cannot claim a refund, that clause is unenforceable. Moreover, the consumer still has the right to a refund.

However, not all terms that conflict with the consumer guarantees are unenforceable. For instance, a term that imposes additional obligations on a business to provide a repair or replacement may be enforceable. Therefore, businesses must ensure that their contract terms comply with the mandatory consumer guarantees in the ACL.

Commercial contract lawyers can draft contract terms that are legally enforceable while also complying with the mandatory consumer guarantees. Otherwise, you may have to face consequences, such as fines, legal action, and reputational damage.

Restraint of trade clauses 

Restraint of trade clauses are commonly used in employment contracts and business sale agreements to restrict the actions of employees or sellers that may harm the interests of the employer or purchaser, respectively.

We’ve written extensively on non compete clauses.

These clauses can protect a company’s confidential information, intellectual property, customer relationships, and other valuable business assets. However, the enforceability of these clauses is heavily regulated under Australian law.

Typically restraint of trade clauses are presumed unenforceable unless the employer or purchaser can show that the clause is necessary to protect a legitimate business interest and is reasonable in scope and duration.

Example of restraint of trade clause

A clause that restricts an employee from working for a competitor for six months after leaving the company may be enforceable. However, two conditions must be satisfied:

• it must be necessary to protect confidential information or customer relationships (or other legitimate business interests; and
• it must not go against public policy or unreasonably restrict the employee from earning an income.

Example of restraint of trade clause

A clause that prevents an employee from working in the same industry for five years after leaving the company may be considered unenforceable. Such a clause is overly broad and could prevent the employee from earning a living.

A commercial contract lawyer can help you understand the enforceability of restraint of trade clauses. They can negotiate the terms of these clauses to ensure that they comply with Australian law. Moreover, they can advise you on the impact of a clause and negotiate with the other party to ensure the clause is necessary and reasonable.

Deeds that aren’t signed properly

For a deed to be legally binding in Australia, it must be signed correctly in accordance with specific legal requirements. The signature requirements for a deed typically include signing in the presence of a witness who attests to the signature.

Failure to follow these requirements can result in the deed not being legally effective. Ultimately, the parties may not be able to rely on it to enforce their rights. 

Example

A property transfer deed that is not signed correctly may not transfer ownership of the property, leaving the parties without legal title to the property.

Legal advice from a commercial contract lawyer can ensure that the deed is executed correctly and is enforceable. They can help ensure that the deed accurately reflects the terms of the agreement, all necessary parties have signed it, and it is attested or acknowledged by an authorized person, making it legally enforceable.

Unfair contract terms

Unfair contract terms give one party an unfair advantage over the other and are often found in standard-form contracts. These terms are typically non-negotiable and can put the weaker party at a disadvantage. As such, the Australian Consumer Law (ACL) contains provisions allowing courts to declare unfair contract terms in standard form consumer contracts void and unenforceable.

Examples of unfair contract terms

Here are some examples of unfair contract terms that may be considered unenforceable:

• Terms that allow one party to vary the terms of the contract without the other party’s consent,
• terms that limit the liability of one party in situations where they are at fault, and
• terms that prevent one party from taking legal action against the other party.

If a court declares a contract term unfair, it is treated as if it never existed in the contract. However, the parties are bound by the rest of the contract. Therefore, the remainder of the contract remains in force. Only the unfair term is struck out.

It is important to note that the ACL only applies to standard form contracts, not contracts negotiated between parties. Also, the ACL only applies to consumer contracts and not to contracts between businesses.

If you believe that a term in a contract is unfair, you should seek legal advice from a commercial contract lawyer. They can review the contract and advise you on your options, such as renegotiating the terms or taking legal action.

How Prosper Law Can Help?

Prosper Law is Australia’s online law firm. We provide legal advice to businesses and individuals across Australia. Our areas of legal practice include contracts, entertainment, eCommerce, publishing, legal counsel and employment law.

If you need to talk to a commercial contract lawyer, get in touch today.

Contact the team at Prosper Law today to discuss how we can provide you with advice for a fixed fee or at affordable hourly rates.

Farrah Motley | Director

PROSPER LAW – Australia’s Online Law Firm

M: 1300 003 077

E: enquiry@prosperlaw.com.au