Unfair contract terms amendments. What makes a contract term unfair?

In the first part of this series, we looked at expansion of the unfair contract terms (UCT) regime to a broader group of businesses. This becomes effective on 10 November 2023 through amendments to the Australian Consumer Law (ACL).

In this second article, we look at what contract terms may constitute an UCT.

What is an unfair contract term?

From 10 November, the definition of “small business” will include any business employing under 100 employees or having under $10 million annual turnover (SMEs). A business only needs to meet one of these tests to be protected, which equates to around 2.3 million businesses. 

A UCT term must be in a “standard form contract” (i.e., that was prepared by one party and is not subject to negotiation - it is offered on a ‘take it or leave it’ basis), entered or varied on or after 10 November.  Shipping and insurance contracts are excluded.

Under ACL s 24, a contract term is unfair if it:

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

(collectively UCT Elements)

To be unfair, a party must prove all three UCT Elements exist on the balance of probabilities. Courts can consider any matters they think relevant but must consider whether the term is transparent (understandable) and the contract as a whole. Therefore, a clause substantially favouring one party may not be a UCT if the disadvantaged party can’t show it caused any detriment.

Examples of unfair terms

ACL s 25 provides examples of unfair terms, but these are guidance, and there is no “one size fits all” approach. The courts look at the facts of each case.

Here are some s 25 examples we commonly see:

Unilateral right to vary. Contracts often include express rights for the owner to vary the contract without allowing the contractor to object or negotiate. Sometimes the contractor must implement the variation, even if the price is not agreed upon. Whilst it is occasionally necessary to implement a variation quickly to protect the owner’s legitimate interest, the contract should provide the contractor a mechanism to receive a reasonable adjustment of the price. If the owner has sole discretion to determine the price adjustment, that might be a UCT.

Unilateral termination right. Terms allowing one party to terminate at their convenience may be a UCT if that term is not necessary to protect the advantaged party’s legitimate interest. To reduce the risk, the clause should provide a reasonable notice period and reasonable compensation.

Unreasonable risk allocation. Contracts that allocate most or all risks to one party are unfortunately quite common and come in many forms. For instance, some liability clauses disproportionately limit or exclude one party’s liability despite the fact their own actions caused the loss. Excessively wide indemnity clauses, or those that are disproportionate to the service or a product type or value, might be UCTs. For example, a contractor providing engineering design support documenting drawings after construction of a bridge should not have to indemnify the other party if that bridge collapses.

Next steps

With 10 November only two short months away, you should review your suite of contracts as soon as possible and ensure your house is in order; if you don’t, the consequences could be severe!  Ask yourself:

• Are your contracts “standard form contracts”?
• Do your contracts contain terms that cause significant imbalance in the parties’ rights and interests?
• If you answered yes to either or both questions, is your counterparty an SME?

In our third and final article, we will look at ways to establish if your counterparty is an SME, what happens if your contract contains a UCT, and also address other practical issues.