Commercial Law Update - Unfair contract terms & small business contracts: 5 things to keep in mind

Commercial Law
Leigh Howard Headshot

The unfair contract terms regime is set to assume a far greater importance for all commercial lawyers. This is because amendments to the Australian Consumer Law are set to extend the regime to standard form “small business contracts.”

A lot has already been written about the amendments, and no doubt you will be familiar about how they will operate. The ACCC has provided a very good summary here.

The amendments will lead to curly questions from clients. It is probable that those questions will spill into litigation. When you are called upon to advise, I would keep the following 5 things in mind:

  1. ‘Unfairness’ as a normative standard connotes different, lower-level conduct when compared to unconscionability (ACCC v Chrisco Hampers Australia Ltd(2015) 239 FCR 33, [41]). Divorce yourself from the policy underpinnings behind other vitiating doctrines. Focus on the text of the unfair contract term provisions.
  2. Compare the contract with the impugned term against the contract without the impugned term. First, this will help you determine whether or not the term is 'reasonably necessary' to the party seeking to rely upon it. Second, it will help you assess whether or not a 'significant imbalance' has been created in light of the terms of the contract as a whole (Director-General of Fair Trading v First National Bank plc [2002] 1 AC 481 [54]). A particular term may appear to be unfair, but when considering the entire contract, it may not create a significant imbalance.   
  3. Some terms will be more susceptible to the regime than others. For my part, I would carefully scrutinise terms that provide for wide indemnities, unilateral variation, early termination fees, automatic rollover, termination without cause, liquidated damages, limited liability, and forfeiture.  Section 25 provides some examples, but the list is not exhaustive. The term is not automatically unfair if it appears in the s 25 list.
  4. Unfairness is assessed at the formation of the contract. Conduct during performance of the contract does not appear to be relevant to determining whether or not the term is unfair (Ferme & Ors v Kimberley Discovery Cruises [2015] FCCA 2384, [55]).
  5. The jurisdiction could be invoked to preempt litigation over the term. If litigation over the term is foreshadowed, you may be able to beat your opponent to the chase by seeking a declaration that the term is void. Given that post-formation conduct is not relevant, seeking a declaration may be straightforward in the simple case. If a declaration is made, the rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

The small business contracts amendments take effect from Saturday, 12 November 2016.

Note: This post is an educational/academic discussion on matters of law. It should not be considered as legal advice.

Leigh Howard Headshot

Leigh's practice spans industrial relations, regulatory and public law.

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