The unfair contract terms regime of the Australian Consumer Law (Competition and Consumer Act 2010 (Cth) sch 2 sections 23 - 28) apply to contracts entered into by consumers, or by small businesses who employ less than 20 people and the value of the contract is $300,000 in a single year, or $1million if the contract runs for longer.
The regime means that a court can declare that a term of a standard form contract is void if it considers the term is "unfair".
What is a standard form contract?
A standard form contract is one that has been prepared by one party to the contract (the supplier). These contracts are not subject to negotiation between the parties and the party who has not prepared the contract has no real bargaining power. They can only accept the contract as it is or not enter into it at all.
Examples of consumer transactions covered by the provisions include contracts for :
- Domestic building
- Motor vehicles
- Private education
Insurance contracts regulated under the Insurance Contracts Act 1984 (Cth) are not covered by these provisions. However, private health insurance contracts and state and Commonwealth government insurance contracts are not regulated by the Insurance Contracts Act 1984 (Cth) so they are subject to the unfair contract terms provisions.
Small businesses may also be presented with a standard form contract on a 'take it or leave it' basis. Some examples include:
- Courier services
- Supply of raw materials or parts
- Waste management or cleaning services
When can a term be declared unfair?
A term will be declared unfair by a court if it can be established that a term in such a contract:
- will result in a significant imbalance in the parties’ rights and obligations; AND
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; AND
- would cause detriment (either financial or otherwise) to a party if it were to be relied on.
All three conditions (i.e. ‘signficant imbalance’, ‘not reasonably necessary’ and ‘cause detriment’) must be met before a court will decide a term is unfair.
Examples of an unfair term include:
- a term that permits one party (but not the other) to avoid or limit performance of the contract;
- a term that permits one party (but not the other) to terminate the contract;
- a term that penalises one party (but not the other) for a breach or termination of the contract.
[see Competition and Consumer Act 2010 (Cth), Schedule 2 s 25]
Only a court has the power to determine whether a contract term is unfair. That does not mean that all disputes about unfair terms must be decided by a Court, and you should always try to negotiatewith the other person or business first.
Unfair terms may exist in any type of consumer or small business contract. Be careful of on-line contracts and take the opportunity to read them carefully. If there is anything you do not understand, you should ask the supplier. Also take careful note if you are asked to sign a very long agreement. You may find that the agreement is not in transparent language, and may contain hidden terms that could be unfair. In fact, a long contract that is confusing and contains inconsistent or vague terms may be found to be unfair.
Small businesses may find some useful examples of the types of terms that are considered unfair on the ACCC website under Unfair Contract Terms FAQ.
What happens if a term is found unfair?
Although a court may find a particular term to be unfair this results only in the term itself being void (i.e. it will be treated as if it never existed). However, the contract itself will continue to be binding if it is capable of operating without the unfair term.
Terms excluded from the unfair terms provisions
The following contract terms are excluded from the unfair terms provisions [s 26]:
- Terms that define the main subject matter of a contract – that is, the goods or services (including financial services or products) that the consumer is purchasing under the contract. It can also include a term that is necessary for the supply of goods or services to occur e.g. where a consumer agrees to buy a product online and to have it delivered by post, they cannot later challenge the delivery term as unfair, because it was necessary for the supply of the item they agreed to purchase.
- Terms that set the upfront price payable under the contract – that is, the amount the consumer agrees to pay under the contract for the supply of the goods or services.
What to do if you think a consumer contract term is unfair
- Get some legal help regarding whether or not the term is unfair and ask for help to write to the supplier or company, setting out why the term is unfair. If the supplier or company insists on performance of the unfair term, legal action may be an option. Remember that legal action can be expensive and time-consuming, and there is no guarantee of the outcome.
- You can make a complaint to the ACCC or ASIC (in the case of financial services and products). However, whilst the ACCC or ASIC can seek the cooperation of businesses in removing unfair contract terms they do not have the power to state whether a contract term is unfair – this is a matter for the courts.
- Small businesses may also get assistance from the Small Business Commissioner.
Lodging legal action
Determining the appropriate court and jurisdiction in which to lodge an unfair contract term action can be a complex matter. Legal advice should be sought if you wish to pursue an applicaton to have a contract term declared unfair.
More information for consumers and small business
More information about unfair contract terms for consumers can be found on the ACCC website under Unfair Contract Terms. For small business, visit the ACCC website Business Rights and Protections page.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.