What are unfair contract terms?

Presently the unfair contract provisions of the Australian Consumer Law (ACL) apply to consumer contracts only, but do not apply to a contract to supply goods or services from one business to another for business use.

Consultation regarding unfair contract terms for small businesses was recently conducted by the Australian Treasury. 

The Australian Treasury states that small businesses are being negatively affected by unfair contract terms that are being written into standard contract terms. The aim of the consultation process is to provide small businesses with the same protections, in regards to unfair contract terms, as consumers. 

What are unfair contract terms?

A term of a consumer contract will be considered unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations under the contract;
  • it is not reasonably necessary to protect the legitimate interest of a party to the contract; and
  • it would cause detriment to a party to the contract if it were to be applied or relied upon.

The ACL has implemented protections for consumers against unfair contract terms within standard form contracts. In general, standard form contracts are typically those where the contract is prepared by one party to the contract and not negotiated between the parties. The contract is essentially offered on a “take it or leave it” basis.

An example of an unfair contract term (in the context of the proposed small business change) is the inclusion of a condition that allows the supplier business to unilaterally change the contract without providing a balancing right to the purchasing small business owner. Such a balancing right might include: (a) allowing the small business owner to withdraw from the contract; or (b) require the small business owner to give its consent before the change was relied on.

What will the changes to the law mean for small businesses?

If the law is changed to provide protections to small businesses the Treasury states that “a court would be able to cancel out terms it finds unfair in business contracts offered to small businesses”.

If you feel you or your business has been subjected to unfair contract terms in commercial contracts then contact a commercial lawyer to discuss your situation. 

Treasury released the consultation paper on 23 May 2014. Submissions closed on 1 August 2014.