Unfair contract terms – what clauses are unfair?

One of the biggest questions papillon Lawyers get asked from clients is around just what constitutes an “unfair contract”. The answer is far from clear – under the legislation as it currently stands, courts have been given wide discretion to determine the application of the rules. The ACCC has capitalised on this lack of clarity by creating fear in businesses that may be targeted by regulatory powers.

So, what has happened, and what can we learn from it to protect our businesses from regulator action in the future?

9 November 2023 changes

From 9 November 2023, changes to the Australian Consumer Law prohibited businesses from proposing, using, or relying on unfair contract terms in standard form contracts with consumers and small businesses (the threshold for small business contracts has increased to apply to small businesses that employ fewer than 100 persons or have an annual turnover of less than $10 million).

Courts can now impose substantial penalties on businesses and individuals who include unfair terms in their “standard form contracts”.

“Standard Form Contracts”

Under both the pre and post-9 November 2023 changes, a “standard form contract” is one that is put forward by one party and the other party is not given an opportunity to negotiate or amend those terms and conditions. In determining this, the court will take into account several factors, including but not limited to the respective power of the parties, whether the contract was drafted prior to the transaction, and whether it was possible to negotiate the terms. The onus is on the party providing the contract to prove it is not a “standard form” contract.

The 9 November 2023 changes expressly include consideration of whether that contract has been entered into and the number of times this has been done. They also note that a contract can be “standard form” if the changes are small and insubstantial or selected from a set of pre-drafted changes.

Unfair Contract terms

Under both the pre and post-9 November 2023 laws, a term is “unfair” if it:

• causes a significant imbalance in the parties’ rights and obligations under the standard form contract;
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
• causes detriment to a party if the term was applied or relied on. 

Specific terms that have been found to be “unfair”

Given the broad discretion discussed above it is difficult to determine in isolation whether a term would be considered to be “unfair”. However, as per Thomson Reuters, examples of clauses that courts and the ACCC have found fall within the definition of unfair include where a party:

1. can cease the supply under the contract but the other party must continue to pay;
2. has a unilateral discretion to honour a warranty;
3. can vary the contract unilaterally or unilaterally vary terms that could cause detriment;
4. can vary the specifications of the goods or services unilaterally (without notice);
5. can assign the contract unilaterally where the assignment is to the detriment of the other party (and the other party does not have that right);
6. can vary the price unilaterally without the right to terminate or negotiate a lower price (with or without notice);
7.  has broad indemnities or excessive limits of liability, or requires liquidated damages to be paid, in favour of one party and not the other, in circumstances where the loss would be caused, or could be avoided or mitigated by the indemnified party, or the risk is otherwise distributed unfairly;
8. can unilaterally choose to renew or not renew the contract, and the other cannot;
9. imposes an automatic renewal of the contract on the other, where the duration is the same and similar to the original length, and the ability to terminate is limited to a short period or various other difficult-to-meet conditions;

10. imposes unfair termination provisions on the other, including where:

• one party can terminate unilaterally;
• one party can restrict the other’s right to terminate if they have outstanding payments and then require them to keep paying;
• the contract does not require a refund of pre-payment where a contract is terminated for non-performance;
• one party can terminate on a fixed notice period, ignoring the length of the contract;
• one party has a broad right to terminate without allowing time to remedy a breach;
• one party is penalised for minor or inconsequential breaches;
• one party is subject to significant exit fees; or
• one party can terminate when the other party unilaterally varies the contract, but does not provide adequate remedies.

11. imposes unfair payment obligations on one party but not the other, including:

• requiring an unreasonable deposit or penalty interest;
• requiring one party to pay despite the other party failing to provide the goods or the other       party having no control;
• requires an invoice to be paid despite not receiving a good or service;
• allows one party a unilateral right to set off; or
• enabling one party to suspend the supply of goods or services but still require the other party to continue to pay.

12. imposes unreasonable exclusivity obligations on one party, for example, a party is unable to contract with others for additional services (and can only use the current party).

13. requires “unrestricted support” for any action unilaterally taken by the other party (with particular focus on indemnities for IP rights);

14. has an unrestricted right to inspect the other’s premises, without notice or other requirements;

15. restricts disputes or litigation by one party only, for example:

• by having one party determine if a contract has been breached;
• by stopping a party commencing litigation or DR;
• limiting a party’s right to sue or lead evidence (like making a party represent that no representations or promises were made prior to a contract being entered into);
• requires a party to pay the other’s costs on an indemnity basis; or
• requires a party to commence proceedings in a foreign court.

16. Includes a non-disparagement clause, prohibiting negative reviews by a party;

17. allows a party to unilaterally determine if notice has occurred;

18. prevents a party from relying on pre-contractual representations, or by misleading them as to their rights with regard to these representations;

19. provides a term that creates ambiguity or lack of transparency, including by not using plain language, making it clear and inaccessible, setting it out in small print, hiding it in the contract or failing to draw attention to it; and

20. otherwise includes a clause that the courts find is unfair. 

Conclusion

If you think your business might violate these requirements or simply want a third party to review your contracts, Papillon Lawyers can help. Please feel free to reach out at matthew.hodgkinson@papillonlawyers.com or set up a meeting via our link above today.