Unfair Contract Terms – What Does It Mean?

In our last article about “unfair contract terms and small business” we set out the new unfair contract regime that will apply to business to business contracts (B2B) from November 2016.  The question though will be what is an unfair contract term? how do you identify an unfair contract term? and once identified, what do you do? This article tries to give some guidance on these issues.

The unfair contracts regime already applies to business to consumer (B2C) contracts where the unfair contract terms have already been tested.  In ACCC v CLA Trading  (2016) FCA 377, the Federal Court made declarations and imposed penalties against Europcar (being CLA Trading) for breach of the unfair contract law.

The facts as accepted by Europcar (who as part of the judgment agreed that they had breached the law) was that Europcar’s insurance products offered on the hire of a car were unfair in two (2) material respects.  Firstly, the Europcar standard contract imposed a “damage liability fee” (a form ‘excess’) where a hirer caused damage to the vehicle irrespective of whether the hirer was at fault.  Secondly, where insurance cover was taken up by the hirer the insurance was avoided in circumstances where the hirer was in breach of the contract even if the breach was minor or trivial.

In deciding whether these clauses were “unfair contract terms”, the court identified the following elements which make a contract term “unfair”:

  1. The purpose of the unfair contract laws is to respect contracts but prevent abuses from stemming from consumer contracts. The assessment as to whether a term is unfair should be made as to the effect of the contract with the term and its effect without the term;
  1. The law requires that there be a “significant” imbalance between the parties. Significant imbalance is where the terms favour one party with powers or discretions not available to the other party or imposes a disadvantageous burden risk or duty upon one party to the contract. The term “significant” means “sufficiently high” or “substantial”;
  1. Terms of a contract may be unfair even if the terms are drawn to the attention of the consumer.
  1. In reviewing the contract, not all contractual terms are equally relevant, the key inquiry is whether specific terms tend to counterbalance the rights of the parties.

The above principles should similarly apply to B2B contracts from November 2016.  If you are concerned about the impact of the unfair contract terms upon your business please feel free to contact our lawyers to discuss.

Heath Adams is a Director of Adams & Partners Lawyers, and head of the commercial legal team within the firm. Heath’s primary focus is on servicing clients in the franchise sector including new and emerging franchise systems. He is an accredited specialist in Business Law. Read more about Heath here.

About Heath Adams

Heath Adams is a Director of Adams & Partners Lawyers, and head of the commercial legal team within the firm. Heath’s primary focus is on servicing clients in the franchise sector including new and emerging franchise systems. He is an accredited specialist in Business Law. Read more about Heath here.