Key Indicators of Unfair Terms

Here’s what qualifies a contract term as unfair:

• Imbalance: A term that significantly tips the balance, favoring one party’s rights and obligations over the other.;
• Unjustifiable Protective Measures: A term that, without reasonable necessity, provides protection to the interests of the advantaged party; and
• Likelihood of Causing Detriment: A term that, if enforced, would result in financial loss, delays, or distress to any party.

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Examples of Unfair Contract Terms Include:

Below are simplified examples illustrating what may constitute an unfair term:

• One-Sided Obligations: Any term that allows only one party to escape or limit their responsibilities under the contract, such as unfair warranties or payment conditions.
• Unilateral Changes: A term allowing a party to change or terminate the contract on their own accord.
• Automatic Renewals: Terms that auto-renew or roll over a contract without the need for re-approval.
• Limiting Evidence: A term that restricts, or effectively restricts, the evidence a party can present in related legal proceedings.
• Evidential Burden: Imposing the burden of proof in any legal dispute regarding the contract predominantly on one party.
• Indemnity: Providing a broad, one-sided indemnity that predominantly benefits the business.
• Liability Cap: Imposing a maximum limit on the amount of liability.‍
• Penalties: Terms that penalise, or effectively penalise, only one party for a breach or termination of the contract.‍
• Price Alteration: Allowing one party to change the agreed upfront price without providing the other party the right to end the contract.‍
• Altering Goods or Services: Permitting a party to unilaterally change the characteristics of goods, services, or interest in land involved in the contract.‍
• Determining Breach or Interpretation: Allowing one party sole power to decide if the contract has been broken or to interpret its meaning.‍
• Vicarious Liability Limit: Limiting one party’s indirect liability, especially for its agents.‍
• Contract Assignment: Enabling one party to transfer the contract to someone else, potentially harming the other party, without their consent.

Who is Affected?

The reforms apply to all businesses that use standard-form agreements in dealing with consumers and other small businesses in relation to:

• Supplying of goods or services,
• Selling or leasing land, or
• Supplying financial services (e.g. accountants) or financial products (e.g. insurance).

Due to these drastic changes, businesses must review their terms of trade and alter their agreements to satisfy the requirements under the new unfair contracts regime. Given the broad range of activity the new regime applies to, businesses in almost all sectors will be affected.

Who is Not Affected?

Certain types of contracts remain excluded from the operation of the new unfair contracts regime, these include:

• Certain life insurance contracts;
• The operating rules of licensed clearing and settlement facilities.
• The operating rules of licensed financial markets such as the ASX; and
• Settlement systems by the Reserve Bank of Australia (RBA).

What is the Legal Test for Unfair Terms?

A term of a consumer contract is unfair if it:

1. causes a significant imbalance in the parties’ rights and obligations;
2. is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
3. would cause a detriment to a party if it were to be applied or relied on including financial, delay or distress detriment.

All three limbs must be proven to exist on the balance of probabilities for a Court to decide that a term is unfair.

A Court will also read the contract as a whole and consider other matters that are relevant including the extent to which the term is transparent, understandable and accessible.

That means that terms are less likely to be considered unfair if they are put in a way that consumers can understand when and how they are likely to be affected and relied upon by your company.

Will the ACCC Actually Target my Small Business?

The ACCC has been a staunch advocate for penalties applying to unfair contract term breaches. All businesses should expect significantly increased scrutiny and avoid gambling with the future of their businesses, particularly during a period of economic uncertainty.