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  • Writer's pictureJohn Lowry

Unfair Contract Terms - What does it mean to you?

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Construction contracts are notorious for imposing conditions that are impossible to fulfill. You can red more about this in Killer Contracts, here >> These are contracts that are designed to kill or seriously wound your business if anything goes wrong.

The Australian Consumer Law (ACL) protects consumers from unfair terms in standard form contracts. It has gone some way towards recognising and addressing unfair contract terms for small businesses.

Comment: These protections for small business, whilst welcome, in my opinion they are very limited in scope and effectiveness. It covers a tiny proportion of the industry and is likely it would not be easy or cheap to enforce.

Standard Form Contracts

The unfair terms rules apply to "standard form contracts". Typical examples are tailor-made standard subcontract conditions or standard construction contracts provided by large clients.

You’re allowed to use standard-form contracts, as long as the terms in them are fair.

An unfair term:

  • doesn’t fairly divide the parties’ rights and obligations

  • is not necessary to protect your interests

  • would cause loss, if applied or relied upon, to either the consumer or small business.

This clip from the Australian Consumer Law explains unfair contract terms.

Note: this video was produced prior to the introduction of unfair contract terms protections for small businesses in 2016.

Contracts for small businesses are standard-form contracts if you:

  • prepare them in advance for a small business to sign

  • offer it on a ‘take it or leave it’ basis to all small businesses

  • will not negotiate on contract terms with small businesses.

Contracts and terms that are not covered for small businesses

There are a number of contracts excluded from the unfair contract term protections that do not generally apply to construction.

There are also number of terms excluded from the unfair contract term protections, being:

  • terms that define the main subject matter of the contract

  • terms that set the upfront price payable

  • terms that are required or expressly permitted by a law of the Commonwealth, state or territory.

Small businesses On 12 November 2016, small businesses were included in the ACL unfair contract term protections. The law applies to contracts entered into or renewed on or after 12 November 2016, and where: the contract covers the supply of goods or services or the sale or grant of an interest in land at least one party is a small business, meaning you employ less than 20 staff (including casual employees) the upfront price payable is no more than $300,000 for a 12 month contract, or $1 million for contracts longer than 12 months. If changes are made to a contract after 12 November 2016, the law only applies to the changed terms. Declaring a term unfair Only a court can declare a term to be unfair.

The court must:

  • take into account whether the term is transparent

  • consider the contract as a whole.

When a term of a contract is found to be unfair, the term is void as if it never existed. The contract is still valid to the extent that it can operate without that term. A term on its own may seem unfair. However, the term may be reasonable when it is looked at as a part of the whole contract.

Types of unfair terms Unfair terms might give you, but not the consumer or small business, the right to:

  • avoid or limit delivering on the contract

  • terminate the contract, with or without the knowledge of the consumer or small business

  • avoid penalties for breaking or terminating the contract

  • change the terms of the contract

  • renew the contract automatically

  • change the upfront price without giving the consumer or small business the option to cancel the contract

  • vary the characteristics of the goods or services to be supplied.

A term may unfairly protect your interests if it lets you:

  • decide by yourself what is a breach of contract

  • choose what the contract means

  • take no responsibility for the actions of your agents or contractors

  • pass your contract responsibilities to another party without their consent

  • limit the consumer’s or small businesses right to sue you

  • limit what evidence the consumer or small business can use if they do sue you

  • impose the burden of proof on the consumer or small business in legal proceedings.

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