Determining whether a contract term is unfair

The fairness of a term must be considered in the context of the contract as a whole. Only a court or tribunal can determine whether a term is unfair.

Meaning of ‘unfair’

To be ‘unfair’, a term must:

  • cause a significant imbalance in the parties’ rights and obligations
  • not be reasonably necessary to protect the legitimate interests of the party advantaged by the term, and
  • cause financial or other detriment (such as delay) to a small business if it were relied on.

Ultimately, only a court (not the ACCC) can decide whether a term is unfair.

In deciding whether a term is unfair, a court must consider how transparent the term is, as well as the overall rights and obligations of each party under the contract. The court may also take other relevant matters into consideration.

Transparency of the term

A term is transparent if it is:

  • expressed in reasonably plain language
  • legible
  • presented clearly
  • readily available to any party affected by the term.

Terms that may not be transparent include terms that are hidden in fine print or schedules, or that are phrased in legal, complex or technical language. However, a term that is transparent could still be found to be unfair.

The contract as a whole

The fairness of a particular term must be assessed in light of the contract as a whole, including any other terms that may offset the unfairness of the term. For example, a potentially unfair term may be counterbalanced by additional benefits being offered to the other party.  This means that a term could be unfair in one contract but not unfair in another.

Examples

The following examples may provide some guidance when considering the types of terms that may raise concerns under the unfair contract terms law.

Example one: right to unilaterally vary the contract

A small business enters into a two year contract for internet services. Under a term of the contract the internet service provider has the right to change its prices or services at any time without prior notice to the small business. The small business does not have the right to end the contract, even if the internet service provider increases the price significantly.

This term is likely to raise concerns as it allows the internet provider to unilaterally increase the price – varying one of the most important terms in the contract.

Example two: automatic rollover

A small business enters into a 12 month contract with an advertising company to manage its promotional activities. Despite the 12 month term of the contract, a term in the contract has the effect of automatically renewing the contract for a further 12 months unless the small business gives written notice that it does not wish to renew the contract at least six months before the initial term expires. Under the contract, the small business must pay a large fee if it wishes to terminate the contract early.

This term is likely to raise concerns as it allows the advertising company to automatically renew the contract without the small business’ express consent.

Example three: no right to refund of deposit

A small business enters into a contract with a supplier to buy car parts. Under the terms of the contract, the parts must be supplied by a date specified in the contract. If the supplier is unable to supply the parts by the deadline, the small business has the power to terminate – however, if it does so, it must forfeit its deposit.

This term is likely to raise concerns as the term penalises the small business for terminating the contract in circumstances where the supplier has not met its obligations under the contract.

Example four: right to terminate without cause with liquidated damages

A small business enters into a two year waste management contract.  The agreement provides that the supplier may terminate the agreement at any time by giving the small business 30 days’ notice. Another term of the agreement provides that, if the agreement is terminated, the small business must pay the supplier damages equal to the service fees for the remaining period of the agreement.

The term requiring the small business to pay damages is likely to raise concerns as it allows the supplier to effectively penalise the small business in the event of termination, even if the supplier terminates without cause. Such a term is unlikely to be necessary to protect the supplier’s legitimate interests.

Example five: limited liability

A small business enters a contract with a removal company for an office relocation. A term of the agreement states that the removal company accepts no liability for any loss arising in the move, including loss arising as a result of the removal company’s negligence.

This term is likely to raise concerns as it seeks to limit rights the small business would otherwise have against the removal company.

Example six: right to terminate franchise agreement with no cause

A franchisee enters into a five year franchise agreement with a franchisor. The agreement contains a term that states that the franchisor can terminate the agreement at any time without cause (i.e. even if the franchisee hasn't breached the agreement). The agreement also states that if the agreement is terminated, the franchisee will not receive any compensation.

This term is likely to raise concerns as it is unlikely that such a term is necessary to protect the franchisor’s legitimate interests.

Example seven: franchise operations manual

A franchisee enters into a five year franchise agreement with a franchisor. The agreement contains a term that states that the franchisee must comply with the terms of the operations manual.

This term is unlikely to raise concerns. However, if the franchise agreement requires the franchisee to comply with the operations manual, the operations manual will form part of the franchise agreement. This means that terms in the operations manual can be declared unfair and made void.

In this example, the operations manual contains a term that states that if a customer makes a complaint about the franchisee, the franchisee must pay $500 to the franchisor. This term in the operations manual is likely to raise concerns as it unfairly penalises the franchisee and is unlikely to be necessary to protect the franchisor’s legitimate interests.

Example eight: right to unilaterally vary a franchise agreement

A franchisee enters into a franchise agreement for a cupcake franchise. A term of the agreement provides that the agreement can be terminated if the franchisee fails to sell a specified minimum number of cupcakes per month. Another term of the contract provides that the franchisor can, at any time and without the franchisee’s approval, change the minimum number of cupcakes the franchisee is required to sell per month.

The term allowing the franchisor to vary the minimum number of cupcakes the franchisee is required to sell is likely to raise concerns as it allows the franchisor to unilaterally make the contract more difficult for the franchisee to comply with. Such a term is likely to cause a significant imbalance in the rights of the parties to the agreement, and is unlikely to be reasonably necessary to protect the franchisor’s legitimate interests.

Example nine: liquidated damages

A small business enters into an agreement with a larger business to lease equipment for one month. The agreement provides that if the small business damages or loses the equipment, it will be required to pay 50 per cent of the amount that would have been paid to the larger business for leasing the equipment for the next five years. This amount is more than the cost to purchase the equipment new.

This term is likely to raise concerns as it imposes an unfair cost on the small business that does not appear to be reasonably necessary to protect the larger business’ legitimate interests.

Example ten: wide indemnity

A small business enters into a contract to provide architectural services to a larger business for a particular project. The contract contains a term that requires the small business to indemnify the larger business against all loss and damage arising in relation to the project, including loss or damage caused by the larger business.

This term is likely to raise concerns as such a wide indemnity creates a significant imbalance between the rights and obligations as between the parties and does not appear to be reasonably necessary to protect the larger business’ legitimate interests.

If you think a term in your contract is unfair

For unfair terms in relation to financial products and services, contact ASIC.

More information

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