Unfair terms in standard form contracts

Unfair Terms in Standard Form Contracts

Geoffrey Taperell and Dillon Fuzi discuss unfair terms with the extension of the law against unfair contract terms to standard form 'small business contracts'.

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Man signing a contract

On 12 November 2016, the law against unfair contract terms in standard form ‘consumer contracts’ was extended to cover standard form ‘small business contracts’. Under the law, if a term of such a contract is unfair, it is void and unenforceable.

A ‘small business contract’ is a contract for the supply of goods or services, including financial services and interests in land, if:

  • at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons (including casual employees who are employed on a regular and systematic basis)
  • the ‘upfront’ price payable (consideration payable excluding any contingent amounts) under the contract does not exceed $300,000, or $1,000,000 for contracts longer than a year.

A ‘standard form contract’ is a contract prepared by one party which the other party has little or no opportunity to negotiate, and includes contracts offered on a ‘take it or leave it’ basis.

There are a number of situations where the law does not apply, including with regards to terms that:

  • define the subject matter of the contract
  • set the upfront price payable
  • are required or expressly permitted by a law of the Commonwealth, a State or a Territory, such as, for instance, a term required by the Franchising Code or other industry code.

The law also does not apply to:

  • contracts entered into before 12 November 2016, unless renewed on or after that date
  • shipping contracts
  • the constitutions of companies, managed investment schemes or other kinds of bodies
  • insurance contracts covered by the Insurance Contracts Act 1984 (Com).

Only a court or tribunal has the power to make a binding declaration that a term is unfair and therefore void under the law. Some examples of terms that may be unfair include terms that enable one party (but not the other) to:

  • avoid or limit its obligations under the contract
  • terminate the contract
  • penalise the other party for breach
  • vary the terms of the contract.

Whether the remainder of the contract will remain in effect will depend on whether it is capable of operating without the void term. If the other party to the contract has suffered any loss or damage as a result of enforcement or reliance on the void term, the party may seek compensation from the supplier.

Because of the potential adverse financial and reputational consequences of contract terms being declared to be unfair, all businesses should review and, where necessary, revise their standard form terms and conditions of supply.

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