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What Constitutes Unfair Terms Of Contract?

Unfair Terms of Contract

Standard form contracts are common in many industries, such as finance, telecommunications, and commercial leasing. These contracts are prepared in advance by one party, while the other party may be given little to no opportunity to negotiate the terms before entering into the contract.

As a result, consumers are usually faced with standard contracts offered on a ‘take it or leave it’ basis. What’s worse, some standard form contracts even employ some unfair terms that consumers are not able to recognise or appreciate until disputes arise.

To address this undesirable situation, the Australian Consumer Law (ACL) provides comprehensive protections for consumers in relation to unfair contract terms. More importantly, as of 12 November 2016, small businesses can also enjoy the benefit of the protections. This is a remarkable milestone in that small businesses have been officially recognised as vulnerable parties in entering into standard form contracts.

What makes a term unfair?

There is an established test for unfairness within the ACL stating that a term is unfair if it:

  1. would cause a significant imbalance of power between the parties; and
  2. is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  3. would cause detriment to a party.

A term can only be regarded as unfair if all three elements are proved. There is no question that the task of proving unfairness can be extremely difficult and demanding such that many aggrieved parties of unfair contracts shy away from pursuing legal recourse.

So when will a term be an unfair term?

There are several circumstances in which terms of standard term contracts may raise concerns under the unfair contract regime. The following clauses are some examples of common terms that appear in standard form contracts and are ultimately unfair.

1. The right to unilaterally vary the contract

This term may be potentially unfair, as it allows one party (but not the other party) to make changes to the contract as they will.

For instance, with regard to agreements for the supply of goods, if one party is allowed to change the price, the number or the range of the goods, it will considerably affect the other parties’ rights and options under the agreement. Consequently, it may give rise to a significant imbalance of power between the parties.

2. Early termination fees

It is seemingly appropriate and reasonable that one party who wants to terminate the contract early should pay the other party who suffers damage as a result of the early termination. However, it may be unfair under some circumstances.

For example, with fixed term leases with a fixed period of time, tenants may be required to make a decision of either rolling the lease over or terminating it at the end of the period. If the tenant does not make any decisions at that time, the lease will automatically roll over in accordance with the agreement between the parties. In this sense, the landlord is entitled to get early termination fees from the tenant.

Therefore, one cannot conclude that a term of early termination fees alone is unfair, as the biggest concern is whether the party having to pay the fee was aware of the obligation at the time of signing the contract. However, unfairness may arise out of the conjunction of early termination fees and automatic renewal. It would be unfair if one party can unilaterally alter the obligation during the course of lease.

3. Wide indemnity

It seems that indemnity clauses are one of the most frequent clauses in standard form contracts that create issues. Sometimes it is appropriate for some big businesses to impose indemnity obligations on small businesses, such as in the case of a franchise agreement.

However, indemnity clauses would be unfair if a small business does not even cause the damage but is required to bear the liability. Therefore, a wide range of indemnity may be perceived as unfair.

4. Liquidated damages

This term gives the effect that an injured party is entitled to collect a certain amount of money as compensation upon a specific breach. Although it seems to be a reasonable design to oblige the wrongdoer to compensate the injured party, it can still be unfair if the amount does not accurately and fairly reflect the seriousness of the specific damage.

How can we help?

It should be noted that it is difficult to determine whether a contract term is unfair or not, as a court needs to consider terms on a case to case basis. Further, unfair terms can occur in many other circumstances that have not been explained here. Therefore, we highly recommend that you seek independent legal advice before entering into a standard form agreement, which can significantly minimise the risk of suffering loss as a result of unfair contracts.

If you are going to enter into a contract that has been prepared by the other party in advance, you should seek advice from a commercial lawyer who can provide you with professional advice as to potential legal issues within the contract.

At Adams Wilson Lawyers, we are here to help you. To find out your rights and options, send us an online enquiry today.