Unfair Contract Terms in Australia

Author: Zeinab Farhat, Progressive Legal

If you deal with contracts regularly, it is essential that you understand how a contract may be construed as “unfair”. Where a contract is found to contain unfair terms, this may render the contract or certain provisions contained within it to be void. In such circumstances, the enforceability of the contract is affected.  

If you’re a business owner, it’s essential that you are familiar with the areas of risk associated with unfair contract terms so as to prevent unnecessary disputes arising in relation to your commercial contracts.  

Alternatively, if you’re a consumer or business which contracts with other businesses, understanding your rights with respect to the contracts you enter into with other businesses (especially larger ones) will provide you with more opportunities to recognise situations where you are being treated unfairly and have legal rights to be able to enforce.  

This article will consider:  

1. what contracts do the unfair contract terms provisions relate to?; 
2. what are unfair contract terms under the UCT regime?;  
3. what are examples of unfair contract terms?; 
4. what terms are exempt?; 
5. how is the law enforced and what penalties exist?; and
6. case law examples.

This article will also consider the recent amendments to the unfair contract laws as per the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth)  (“the Act”) which is an act intended to amend the Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investment Commission Act 2001 (Cth) (“ASIC Act”). 

The Act has rendered that unfair contract terms are illegal and where parties use such terms, severe penalties may be incurred. The Act is also set to come into force on 9 November 2023. Thus, it is essential that you are across the regime.  

What types of contracts does the law govern? 

The Australian Consumer Law (“ACL”) (contained in the Competition and Consumer Act 2010 (Cth))  and the ASIC Act contain provisions which are referred to as the “unfair contract terms” (“the UCT regime”).   

The unfair contract terms apply to standard form consumer contracts and small business contracts. Generally, a standard form contract is a contract prepared by one party to the contract and is not negotiated between the parties. In other words, the contract is provided from A to B on a “as is” basis.  

Standard form contracts 

The ACL does not define what a standard contract is. Section 27(1) provides that if a party to proceedings claims that a contract is a standard form contract, then a presumption operates that it is a standard form contract, unless the other party to the proceedings adduces evidence to the contrary.  

However, section 27(2) of the ACL provides that where a Court is determining whether a contract is a standard contract, it can take into account matters it thinks are relevant, although it must take into account the following: 

• whether one of the parties has all or most of the bargaining power relating to the transaction; 
• whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; 
•  whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented; 
• whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1); 
• whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction; 
•  any other matter prescribed by the regulations. 

Ultimately, standard contracts are cost effective options and can assist in reducing any costs associated with the prolonged negotiation of contracts. Examples of standard form contracts include: 

1. terms and conditions issued to many people; 
2. gym membership terms;  
3. telecommunication provider terms; and 
4. gas and electricity supply terms. 

Can I just negotiate terms to make sure it is not a standard form contract?

No, as this this depends on the nature of the negotiations.  

Section 42 of the Act amends s 27(3) of the ACL to insert the following: 

• A contract may be determined to be a standard form contract despite the existence of one or more of the following: 
  • an opportunity for a party to negotiate changes, to terms of the contract, that are minor or insubstantial in effect; 
  • an opportunity for a party to select a term from a range of options determined by another party; 
  • an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract. 

The effect of this insertion is such that negotiations to amend terms have to be meaningful. For example, a contract term can still be rendered unfair even if other side was able to negotiate a minor provision, as it will still be considered a standard contract for the purposes of the ACL. 

In AIBI Holdings Pty Ltd v Virtual Technology Services Pty Ltd [2022] FCA 696 (“AIBI”) the Federal Court considered whether a contract was a standard form contract. The Court held that the third agreement was not a standard form contract, and thus, the unfair terms case did not arise.  

In considering whether the third agreement in AIBI was a standard form contract, the Court examined each limb of s 27(2). Some key findings of the Court included, inter alia:  

1. Commercial terms: the front pages of the third agreement contained terms which were not standard terms (i.e. the first page contained a particular pricing structure for VTS). The Court noted that this was a minor indicator that the agreement was not a standard form agreement. The Court also noted that “it is in the nature of many standard form agreements that they have covering pages with terms specific to the particular customer” at [70].  
2. Whether there was an opportunity to negotiate: the Court held that AIBI was given an effective opportunity to negotiate the terms of the third agreement and was successful.

Consumer Contracts

Section 23(3) of the ACL provides that a consumer contract is a contract for the supply of goods, or, services, or, a sale or grant of interest in a land for wholly or predominately personal, domestic or household use or consumption. Ascertaining whether something is a “consumer contract” is generally a standard exercise. However, where a “small business contract” is governing the transaction, this may be more difficult.  

A consumer contract is presumed to be a standard form contract unless anything to the contrary is adduced.  

Small Business Contracts 

The current definition of a small business contract under the ACL will apply until 9 November 2023.  

Currently, section 23(4) of the ACL provides that a contract is a small business contract if: 

• the contract is for a supply of goods or services, or a sale or grant of interest in land (s 23(4)(a); and  
• at the time the contract is entered into, at least one party is a business that employs fewer than 20 people; and  
• either: 
  • the upfront price to be paid under the contract is not more than $300,000; or  
  • the contract has a duration of more than 12 months and the upfront price to be paid under the contract is not more than $1,000,000.  

Small Business Contracts – Post 9 November 2023

From 9 November 2023, a new definition of “small business contract” will be introduced. Instead, a small business contract for the purposes of s 23(4) of the ACL will satisfy all of the following: 

• that the contract relates to the supply of goods or services, or a sale of interest in land;  
• at least one party satisfies one or both of the following criteria: 
  • the party creates the contract in the course of carrying on business, and at the time the party employees less than 100 people; and or 
  • the party, for the last income year that ended before or at the time the contract was made had a turnover of less than $10,000,000.  

The changes to s 23(4) now mean that the assessment of whether there is a small business contract now considers the annual turnover of a business or whether there are less than 100 employees.  

Assessment of employee numbers

Section 23(5) of the ACL provides that casual employees are not counted for the purposes of s 23.  

Assessment of turnover

The Act provides that a party’s turnover is the sum of all values, or supplies that the party makes during a period, other than: 

1. supplies that are input taxed; 
2. supplies that are not for consideration (and are not taxable supplies A New Tax System (Goods and Services Tax) Act 1999 (Cth)); 
3. supplies that are not made in connection with an enterprise that the party carries on; and 
4. supplies that are not connected with the indirect tax zone. 

Effects of reform on business owners

The effects of the Act are generally that more contracts will be captured as small business contracts. As such, if you fall within the current and future ACL definitions of “small business contracts”, you should be across what an unfair contract term may look like.   

What are unfair contract terms under the UCT regime? 

If your contract falls within the ambit of the UCT regime, the enquiry then becomes whether the terms of the contract are “unfair”.  

Section 24(1) of the ACL defines when a term of a consumer contract or small business contract is unfair. A term is unfair when it satisfies the three-limb test in outlined s 24: 

1. limb 1: the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract (s 24(1)(a)); and  
2. limb 2: it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term (s 24(1)(b)); and 
3. limb 3: it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. 

Section 24(2) provides that the court, in ascertaining whether a contract term is unfair under 24(1), must consider:  

1. the extent to which the term is transparent;  
2. and the contract as a whole. 

A term is transparent if it: is expressed in plain language, is legible, presented clearly and is readily available to any party affected by the term (s 24(3), ACL). 

What are examples of unfair contract terms? 

Section 25 of the ACL provides some examples of unfair terms for the purposes of s 24. This includes: 

1. a term that permits, or has the effect of permitting one party (but not another party) to avoid or limit performance of the contract (s 25(a), ACL); and 
2. a term that permits or has the effect of permitting one party (but not another party) to terminate the contract (s 25(b), ACL). 

Section 25 is not a limitation of s 24 insofar as it prescribes that terms must fall within one of the examples from s 25(a)-(n) in order to be classified as unfair, but it nevertheless provides a good set of examples by which you can compare your existing contract terms in order to consider whether they should be amended or, alternatively, permit the enforcement of your rights.  

What terms are exempt from the UCT regime? 

Terms which define the main subject matter of a consumer contract or small business captured are exempt from the UCT regime if: 

1. the term defines the main subject matter of the contract (s 26(1)(a)); or 
2. the term sets the upfront price payable under the contract (s 26(1)(a); or  
3. the term is required by a law of the Commonwealth state or Territory (s 26(1)c)). 

The upfront price payable is the consideration provided for the supply, sale or grant under the contract, and is disclosed at or before the time the contract is entered into. It does not include any amounts which are payable contingent on a certain event occurring (s 26(2)). 

How is the law enforced and what penalties exist? 

The Act clarifies that a person contravenes s 23 of the ACL when (s 23(2A)): 

1. the person makes a contract; and 
2. the contract is a consumer contract; and 
3. the contract is a standard form contract; and 
4. a term of the contract is unfair; and  
5. the person proposed the unfair term. 

Prior to the Act if a term was unfair it would follow that the term would be void. In such circumstances, the contract operates as normal and as if that term was never included in the contract.  

However, as a result of the Act this general approach to declaring terms void has been amended and the following civil penalties may apply to breaches of the unfair contract laws: 

Other penalties still include that the term be rendered void and unenforceable as well as injunctions.  

Unfair Contract Terms – Case Examples

Key Takeaways

The expansion of the UCT is set to strengthen consumer protection against unfair contract terms. The new amendments have led to UCTs becoming subject to financial penalties, in addition to expanding the scope of contracts which can be captured under the regime. The ACCC is likely to pursue substantial penalties against businesses or individuals which contravene the new UCT laws.  

If you’re a business owner, we recommend that before the new regime kicks into force on 9 November 2023 you: 

1. review your standard form contracts with consumers or small businesses and ensure they do not have potentially unfair contract terms;  
2. implement programs which train employees on matters of unfair contract terms; and 
3. urgently seek legal advice if you think your terms may be construed as unfair.  

If you require any assistance with reviewing your contract terms, please don’t hesitate to make an enquiry below or call us on 1800 820 083 to speak to one of our experienced commercial lawyers.

Check out our webinar on unfair contract terms:

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