Unfair terms

A national unfair terms regime came into operation in 2010 which rendered void unfair terms in standard form consumer contracts.

Since that time the unfair terms regime has expanded to encompass unfair terms in small business contracts.

The two key provisions are sections 23 and 24.

The prohibition

The Australian Consumer Law (contained in schedule 2 of the Competition and Consumer Act 2010) incorporates a national unfair terms regime. The key provisions are sections 23-25.

Section 23 provides that a term of a consumer contract or small business contract is void if it is unfair and contained in a standard form contract.

Section 24 explains when a consumer contract is unfair. In particular, it is unfair if:

  • it 'would cause a significant imbalance in the parties’ rights and obligations arising under the contract'

  • it is not reasonably necessary to protect legitimate interests; and

  • it would cause detriment to a party if applied/relied on.

Section 25 sets out examples of unfair terms.

Consumer contracts

The prohibition on unfair terms initially applied only to consumer contracts.

A ‘consumer contract’ is defined for this purpose as a contract for a supply of goods or services or sale or grant of an interest in land “to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption." (section 23).

Small business contract

The prohibition on unfair terms now extends to small business contracts.

A ‘small business contract' is defined for this purpose as one in which (section 23):

(a) the contract is for a supply of goods or services, or a sale or grant of an interest in land; and

(b) at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and

(c) either of the following applies:

(i) the upfront price payable under the contract does not exceed $300,000;

(ii) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

 

Standard form contracts

The prohibition applies only to 'standard form' contracts. This is not defined in the Act, but section 27 does provide a list of factors the court may consider, including whether or not one party was effectively ‘required to either accept or reject the terms of the contract ... in the form in which they were presented’ and ‘whether another party was given an effective opportunity to negotiate the terms of the contract’.

Where a consumer alleges a contract is a standard form contract it will be presumed that it is unless the other party proves otherwise (s 27(1)).

 

Unfair terms

A term of a consumer contract is an ‘unfair term’ if it would ‘cause significant imbalance in the parties’ rights and obligations under the contract’ and ‘it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term’ and ‘it would cause detriment ... to a party if it were to be applied or relied on’ (section 24). There is a legal presumption that a term of a consumer contract is not ‘reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise' (section 24(4)).

Section 25 provides examples of terms that may be unfair:

Both procedural and substantive unfairness will be relevant.

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Last updated: 18 October 2019