What is an Unfair Contract – Your No. 1 Guide

In Australia, many different laws govern unfair contract terms. In many instances, contract terms that are considered to be unfair will be unenforceable and in some cases, there are fines for businesses that seek to impose unfair contract terms upon customers or other businesses.

In this article, Farrah Motely, Director of Prosper Law and a commercial contract lawyer, explains what an unfair contract is from a legal perspective, how businesses can comply with the unfair contract terms laws, and what to do if you have signed up for an unfair contract.

What kind of contracts does the prohibition against unfair contract terms apply to? The prohibition of unfair contract terms applies to a term in a consumer contract, a contract that is a ‘standard form contract,’ and a contract for a financial product or service.

However, there are certain contracts and terms that the law does not cover. These include:

1. insurance contracts (private health insurance is covered)
2. contracts for the shipment of goods
3. contracts for superannuation and investment funds.

In many cases where a contract is prepared by a commercial contract lawyer, the contract will be written in a way that complies with the unfair contract terms laws. However, businesses that prepare their own contracts without legal input can run the risk of breaching the unfair contract terms laws.

In addition, the unfair contract terms law covers most terms in ‘standard form contracts.’ However, the following terms are excluded:

1. terms that define the price
2. terms that define the product or service delivered
3. terms that are required or permitted by another law

In other words, a standard form contract is usually drafted by one party (or their commercial contract lawyer) and not negotiated between the parties – it is offered on a ‘take it or leave it’ basis.

What is an unfair contract term?

Only a court can determine whether a contract term is unfair and contrary to law. There are several factors that must be considered to determine an unfair contract term.

These factors are judged from the context of the contract as a whole, not as an individual clause. Therefore, the court will decide whether a contract term is unfair or not by looking at the contract as a whole and the context the contract applies in.

If you are unsure whether a contract term may be considered unfair, it is important to get help from a commercial contract lawyer.

1. there is a significant imbalance between the rights and obligations of the parties to the contract;
2. it is not reasonably necessary to protect the legitimate interests of the party who would benefit from the term; and
3. it causes detriment (financial or otherwise) to a consumer if applied or relied upon.

In order for a term to be declared unfair, courts must establish the existence of all three components of the unfairness test on a balance of probabilities.

It is important to hire a commercial contract lawyer to provide advice on these components.

Significant imbalance

A term that causes significant imbalance requires a factual assessment of the available evidence. The burden of proving a significant imbalance between the parties’ rights and obligations under the contract is on the consumer.

Not reasonably necessary

An unfair contract term is a clause that is not reasonably necessary to protect the business’s legitimate interests. The meaning of ‘legitimate interest’ is open to interpretation.

It must be proven that the term is reasonably necessary to protect your legitimate interests. If you are uncertain whether a term is reasonably necessary, you should contact a commercial contract lawyer.

A business must be able to demonstrate that the legitimate interest is sufficiently compelling to overcome the consumer detriment and that the clause is, therefore ‘reasonably necessary.’ Such evidence may include relevant documentation about a company’s costs and structure, the need to mitigate risk, or specific industry practices.

Detriment

causes harm to the consumer when it is applied or relied upon. Things such as financial loss, delay, or inconvenience to the consumer are considered a detriment.

The consumer does not have to prove that they have suffered actual harm, but they must prove more than one hypothetical case in which they would suffer harm.

You may be wondering how to identify unfair contract terms? Although only a court can declare a term to be an unfair contract term, a commercial contract lawyer can also provide advice in this area.

Changing prices without the agreement of the other party

A business enters into a two-year contract for Internet services. Under the terms of the contract, the Internet service provider has the right to change its prices or services without notice. However, the business does not have the right to terminate the contract even if the Internet Service Provider (ISP) significantly increases the price.

This term is probably questionable because it allows the ISP to unilaterally increase the price, thus changing one of the most essential terms of the contract.

Requiring a customer to pay out the remainder of the contract if the contract is terminated

A business enters into a two-year waste disposal contract. The contract provides that the supplier may terminate the contract by giving 30 days’ notice. Another term of the contract provides that if the contract is terminated, the business must pay the supplier compensation equal to the service fees for the remaining term of the contract.

The term requiring the business to pay compensation is likely to raise concerns. Because it allows the supplier to effectively penalise the business in the event of termination, even if the supplier terminates without cause. It is unlikely that such a clause is necessary to protect the provider’s legitimate interests.

Unfair contract terms in franchise agreements

A franchisee enters into a five-year franchise agreement with a franchisor. The agreement contains a term stating that the franchisor can terminate the agreement without cause (i.e., even if the franchise hasn’t breached the contract). The agreement also states that the franchisee will not receive any compensation in the event of termination.

This term is probably questionable because it is unlikely that such a term is necessary to protect the franchisor’s legitimate interests.

If you would like more examples regarding unfair contract terms, speak to a commercial contract lawyer.

What is taken into account when deciding whether a contract term is unfair?

In deciding whether or not a term is unfair, a court considers how transparent the term is and what rights and obligations each party have under the contract as a whole.

A term is transparent if it is:

• expressed in reasonably plain language
• legible
• clearly stated
• readily accessible to any party affected by the term.

Terms that are not transparent include terms hidden in fine print or schedules, or are expressed in legal, complex, or technical language. However, a transparent term may still be an unfair term. You can get advice about whether a contract term is transparent or unfair from a commercial contract lawyer.

Moreover, the fairness of the term must be assessed in light of the contract as a whole, including any other terms that may offset the unfairness of the term. For example, additional benefits offered to the other party may outweigh a potentially unfair term. This means that a term may be unfair in one contract but not in another.

Some of the things that the court may consider in making its decision include whether the term:

• is necessary to protect the legitimate interests of the company
• would cause unnecessary financial or non-financial disadvantages if enforced by the company
• is transparent
• creates an imbalance between the personal rights and those of the company
• enables only one party to avoid or limit its obligations under the contract
• allows only one party to terminate the contract
• penalises only one party for breach or termination of the contract
• enables only one party to change the terms of the contract

When a commercial contract lawyer advises on unfair contract terms, they will look at each of these criteria.

Where the court declares a term unfair and a business subsequently attempts to apply or rely on the unfair term, the business is in breach of the law.

A court may then:

1. issue an injunction;
2. order the business to pay damages to the affected consumer; or
3. make such other orders as the court deems appropriate.

What are the consequences if a contract term is unfair?

Court orders

Reputational damage

Businesses that try to enforce unfair contract terms are at risk of damaging their reputation. A business’s actions, together with what others say about business = the business’s reputation.

This short formula is a powerful tool to assess your business’s goodwill. Businesses with a good reputation attract better talent and are perceived as more valuable for their products and services.

However, if your company uses unfair contract terms, it may damage your reputation in the marketplace and create a bad customer experience. A good commercial contract lawyer will understand this risk and be able to provide you with legal advice.

It will undoubtedly lead to a loss of customers and declining sales. It can undermine employee retention and make it difficult to recruit new talent, increasing labour costs and hurting operating margins. A company’s reputation affects its ability to do business in the marketplace, attract new customers, and increase sales – activities that are essential to a business’s success and survival.

A business’s reputation and brand equity are intangible assets with real value and it is therefore important to protect a business’s brand.

Avoid unfair contract terms and speak to a commercial contract lawyer.

Potential fines for misleading and deceptive conduct

You need to make sure that the contract terms are not unfair because they could be misleading and deceptive if you convey to your customers that the terms are legally enforceable.

The potential fines or penalties that may be imposed for misleading or deceptive conduct include fines equal to the greater of:

1. $10 million;
2. three times the value of the ‘reasonably attributable’ benefit derived from the violation if the court can determine the value; or
3. if the court cannot determine the benefit, 10 percent of the business’s annual turnover in the preceding 12 months.

Other penalties can also include court-enforceable undertakings, injunctions, declarations, damages, and orders to compensate affected consumers.

The term is unenforceable

Under the Australian Consumer Law (in Schedule 2 of the Competition and Consumer Act 2010), certain terms in contracts are unfair and unenforceable.

If a court declares a term of a contract to be unfair, it becomes void (unenforceable).

The term is treated as if it never existed. However, other terms of the contract remain in force and bind the business and the consumer. This is another reason why contracts should be written by a commercial contract lawyer.

How can Prosper Law help?

Prosper Law is Australia’s online law firm with experience providing legal advice for businesses. Our commercial contract lawyer is highly regarded in Australia and can provide first-class, affordable legal advice.