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Widening the Net on Unfair Contract Terms



Widening the Net on Unfair Contract Terms

An exposure draft of new legislation was released by the Federal Government on 28 April 2015 which will extend the unfair contract terms currently contained in the Australian Consumer Law (“ACL”) to small businesses if introduced. Presently, only consumers have protection under the ACL.

An unfair term is defined as a term that:

  • causes a significant imbalance in the parties’ rights and obligations under the contract;
  • would cause detriment (whether financial or otherwise) to a party if it were to be relied on; and
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

It is important to note that the provisions apply only to standard form contracts. A court may regard a contract as a standard form contract where:

  • one of the parties has all or most of the bargaining power relating to the transaction;
  • the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
  • one party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
  • one party was not given an effective opportunity to negotiate the terms of the contract; and
  • the terms of the contract do not take into account the specific characteristics of the other party or the particular transaction.

An unfair term is considered ‘void’, so that it is essentially struck out of the contract, with the remainder of the contract remaining binding.

The changes will affect any dealing where one party is a small business (i.e. employs fewer than 20 persons) and the value of the contract does not exceed either $100,000, or $250,000 for contracts of more than one year in duration.

The proposed changes are significant for businesses operating across a variety of industries – such as franchisors, landlords and financiers. These businesses may need to adapt their practices and review their contracts to avoid having terms declared unfair and therefore unable to be relied upon.

The draft legislation was introduced into the House of Representatives on 24 June 2015, with the changes anticipated to come into effect in early 2016 if passed.

Marienne Marchesi
Senior Associate
T: (03) 9604 9413

Disclaimer: This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.