Unfair business contract terms

If a business prepares and offers a contract on a ‘take it or leave it’ basis (i.e. the customer has little or no opportunity to negotiate the terms), it is likely to be a standard form contract.

Under the Australian Consumer Law (ACL), a court can determine that a term of a standard form contract between a large business and a small business is unfair and therefore void, meaning that the contract is treated as if the term never existed. The law applies to standard form contracts entered into or renewed on or after 12 November 2016.

If a business prepares and offers a contract on a ‘take it or leave it’ basis (i.e. the customer has little or no opportunity to negotiate the terms), it is likely to be a standard form contract.

The business-to-business unfair contract terms law applies to contracts for the supply of goods, services, or the sale or grant of an interest in land, where:

  • at least one of the parties is a small business (less than 20 employees)
  • the upfront price payable under the contract is no more than $300,000 (or $1 million if the

contract is for more than 12 months).

If the term is declared void, the remainder of the contract continues to bind the parties to the extent that it can operate without the unfair term.

The Federal Court has declared that 12 terms in standard form contracts used by two Servcorp Ltd subsidiaries (one of which is Servcorp Melbourne 18 Pty Ltd) are unfair and therefore void.

The terms declared unfair include those that had the effect of:

  • automatically renewing a customer’s contract, unless the customer had opted out, and allowing Servcorp to then unilaterally increase the contract price;
  • permitting Servcorp to unilaterally terminate contracts;
  • unreasonably limiting Servcorp’s liability or imposing unreasonable liability on the customer; and
  • permitting Servcorp to keep a customer’s security deposit if a customer failed to request its return.

The action, brought by the Australian Competition & Consumer Commission, was intended to reiterate that businesses can no longer impose contract terms:

  1. that create a significant power imbalance between parties;
  2. are not necessary to protect their legitimate interests, and
  3. which would cause significant financial detriment to a small business.

For its part, Servcorp has established an unfair contract terms compliance program for its Australian business.

How can we assist you?

If you are a company wanting to implement standard form contracts or an unfair contract terms compliance program or are a small business that is required to enter into standard form contracts containing what seem like onerous provisions, Lanyon Partners Legal can assist by undertaking a review of the drafting to ensure compliance with the Australian Consumer Law and establishing a compliance program to suit your company.


Disclaimer:

The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice.

Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such require specific examination.

Lanyon Partners cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.