Are there unfair terms lurking in your contracts?

The question businesses should ask themselves before the regulator does

What you need to know

• ASIC and the ACCC now have expanded powers to investigate whether contracts contain unfair terms.
• With the Royal Commission giving renewed focus on both this area and regulator action, they can be expected to use those powers.
• Unfair terms will be severed entirely – they can't be read down.
• Unfair terms don't currently attract civil penalties – but there is a push for that to change and ASIC's new focus on litigation may see it litigate anyway.
• High risk terms include indemnities, unilateral variations, and limits or exclusions on liability. This is commonly because they are non-reciprocal (i.e. one sided), at the discretion of one party and/or provide insufficient remedy or recourse to a party.

The increased focus

The Royal Commission is likely to encourage increased regulator focus on unfair terms, given it:

• identified – as a key cause of misconduct – that institutions tend to set the terms of contracts themselves and consumers tend to have little detailed knowledge or understanding. So regulators may see it as up to them to monitor terms;
• emphasised the importance of the unfair contract terms regime – recommending it be extended to insurance contracts;
• criticised ASIC's approach to ensuring compliance with the unfair contract terms regime;
• criticised ASIC's enforcement culture more generally, encouraging more litigation (as discussed further in a separate update on ASIC Enforcement in the "post-Hayne world").

At the same time, ASIC and the ACCC have (since late 2018) been given expanded powers to investigate terms of consumer and small business contracts to determine whether to commence proceedings for a breach of the unfair contract terms regime (by amendments to section 13 of the ASIC Act and section 155 of the Competition and Consumer Act respectively). The ACCC chair has also been a vocal proponent seeking to make unfair contractual terms illegal so they attract pecuniary penalties.

How the unfair contracts regime works

The unfair contracts regime applies to:

• the supply of goods or services, or the sale or grant of an interest in land (section 24 of the Australian Consumer Law, which is schedule 2 to the Competition and Consumer Act); and
• financial products, and the supply or possible supply of financial services (sections 12BF and 12BG of the ASIC Act).

Terms are void – and cannot be read down – if each of the following elements exist:

• The contract is a consumer contract or a small business contract.
• The term is unfair.
• The contract is a standard form contract, and the onus is on the advantaged party to prove otherwise.

What are consumer and small business contracts?

Consumer contracts have at least one party who is an individual, and the supply is for predominately personal, domestic or household use or consumption.

Small business contracts – in this legislation – have at least one party who is a business that employs fewer than 20 persons and either (i) the upfront price is $300K or less, or (ii) the contract is for more than 12 months and has an upfront price of $1M or less.

When is a term unfair?

A term is unfair if:

• it would cause significant imbalance in the parties' rights and obligations; and
• it is not reasonable necessary to protect the legitimate interests of the advantaged party – and there is an onus on the advantaged party to prove it was reasonably necessary; and
• it would cause detriment (financial or otherwise) to the other party if it was relied on.

When considering whether a term is unfair, the court must take into account:

• whether the term is transparent – plain language, legible, presented clearly and readily available to affected parties; and
• the contract as a whole.

The high risk terms: types of clauses that might be unfair

Whether a term is unfair needs to be considered on a case by case basis. However, the legislation contains 13 examples of terms that may be of concern. They fall into four broad categories:

• Unilateral changes - terms that allow a party to make changes to key elements of a contract, including terminating it.
• Limiting rights.
• Penalties – terms that penalise a party for breach or termination (reflecting the common law concept of penalties).
• Assignment – terms that allow the assignment of the contact to the detriment of the other party without their consent.

The cases that have gone to court have tended to fall into those categories – eg indemnities, unilateral variations, limitations or exclusions of liability, termination and automatic renewals. These are also the types of clauses that are commonly found in most contracts.

Some specific examples in the cases

Of course, whether a particular clause is unfair in one situation does not mean it will be unfair in another. But examples of where courts have found terms to be unfair include:

• clauses which gave a party an unlimited indemnity and made them unaccountable for their actions – eg where a party is indemnified, or able to exclude liability or claims, for loss it causes itself;
• where a party could unilaterally and without limitation exercise a right or discretion, such as varying price, with insufficient recourse to the other party. These clauses have been found unfair in a range of situations – ranging from where the other party has no ability to terminate to it being able to immediately terminate;
• rights to terminate based on an immaterial breach, breach where there is no opportunity to remedy, or breach that has already been remedied;
• rights to terminate without cause on short notice (that is not referrable to the term of the contract);
• a clause which required a party to pay a fee for terminating a contract for services even if the services were ineffective or caused severe side effects;
• a clause which unfairly restricted dealings between one contractual party with third parties – eg restricting a party from contracting with other parties for services not the subject of the contracts.

Authors: Matt Youssef, Senior Associate; Ian Bolster, Partner

?This article was published as part of Ashurst's News and Insights which can be accessed here.

The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.