Contracts and Playing Fair - Unfair Terms in the Australian Consumer Law

In the mid-1800s, the law developed principles according to what is now called “freedom of contract”; that is, that people and businesses should be able to reach any agreement they like, within the bounds of the law.

That being said, the law in more modern times also recognises the commercial reality that at times contracts are simply unfair and that unfair contracts are contrary to the public good. This development is now well-reflected in the Australian Consumer Law (‘ACL’), which is designed to protect consumers and small businesses.

A term of a contract may be found unfair (under the ACL) if:

• The term causes a significant imbalance in the parties' rights and obligations arising from the contract;
• It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it; and
  
  
• It would cause detriment (financial or otherwise) to a party if it were applied.

With the view to deterring the creation of unfair terms, the legislation contains a number of exemplar terms which would be deemed “unfair”. These include, among others, terms which

• Allow one of the parties to avoid performance of the contract;
  
  
• Allow one of the parties to terminate;
  
  
• Allows one of the parties to penalise the other for breach (but not the other way around);
  
  
• Limits one of the party’s rights to sue;

Who is protected by the “unfair contracts terms”?

The “unfair contracts” provisions currently only apply to consumer contracts. That being said, contracts entered into or renewed by small businesses (20 employees or less) after 12 November 2016 will also be protected under the legislation. Once the prohibitions are extended to small businesses, they will only apply to “standard form contracts” with an upfront contract price of up to $300,000 or worth $1,000,000 over a period greater than 12 months.

Unfair contracts can lead to damaging and ongoing obligations. It is imperative that you protect your rights when entering into agreements.

In our next article on unfair contracts, we will explore what remedies are available to someone who has been disadvantaged by an unfair contracts and what their obligations are should the dominant party sue. 

If you have further questions, please contact us at frank@franklaw.com.au.

This is not legal advice.