The “unfair contract terms” provisions of the Australian Consumer Law (ACL) came into operation on 1 January 2010 for the purposes of protecting consumers from unfair terms in circumstances where they have little or no opportunity to negotiate with businesses. 

The provisions currently only apply to standard form contracts for the supply of goods or services wholly or predominantly for personal domestic or household use or consumption (standard form consumer contracts). In other words, they do not currently apply to “business to business” transactions.

What terms are unfair?

A standard form contract is “unfair” if it:

  • causes significant imbalance in the parties’ rights and obligations under the contract;
  • is not reasonably necessary to protect the legitimate interests of the supplier; and
  • causes financial or non-financial detriment to the other party to the contract.

The court must have regard to the transparency of the term and the contract as a whole in determining whether a term is “unfair”.

The ACL includes a non-exhaustive list (known as a “grey–list”) of example contract terms which are likely to be unfair depending on the circumstances. These include:

  • a term that permits one party (but not the other) to avoid or limit performance of the contract;
  • a term that permits one party (but not the other) to terminate the contract;
  • a term that penalises one party (but not the other) for a breach or termination of the contract;
  • a term that permits one party (but not the other) to vary the terms of the contract;
  • a term that permits one party (but not the other) to renew or not renew the contract;
  • a term that permits one party to vary the upfront price payable without the right of the other to terminate the contract;
  • a term that permits one party unilaterally to vary the characteristics of the goods or services to be supplied;
  • a term that permits one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
  • a term that limits one party’s vicarious liability for its agents;
  • a term that permits one party to assign the contract to the detriment of the other without the other’s consent;
  • a term that limits one party’s right to sue another party;
  • a term that limits the evidence one party can adduce in proceedings relating to the contract; and
  • a term that imposes the evidential burden on one party in proceedings relating to the contract.

Extension of Law to B2B Contracts

Earlier this year the Federal Government released draft legislation to extend these provisions to the small business sector. It proposed that the laws would apply to all standard form business contracts between businesses where either party to the contract has fewer than 20 employees and the up-front value of the contract does not exceed $100,000, or $250,000 if the contract is for a term of 12 months or more. Most franchise agreements will fall within the above definitions, so if passed, this legislation will also have profound implications for the franchise sector.

As in the case of unfair standard form consumer contracts, the laws would render void unfair terms in a standard form small business contract, and where possible, leave the remainder of the contract valid and enforceable by the parties to the contract.

Further changes

This month, the Bill for these provisions was passed by the Senate, but not without a number of amendments being made after the Australian Greens won upper house support to target a greater number of standard form business contracts.

These amendments change the definition of “small business contract” so that it now covers a standard form business contract between businesses where:

  • at the time the contract is made, one (or more) of the parties to the contract is a business that employs fewer than 20 persons (counting full-time employees, part-time employees and casual employees who work on a regular and systematic basis, using a headcount approach, regardless of an employee’s hours or workload); and
  • the upfront price payable under the contract does not exceed $300,000 (for contracts lasting up to one year), or does not exceed $1 million (for contracts lasting more than one year).

The amendments also extend the transitional period for the new laws to apply from six to 12 months to enable businesses more time to prepare.

Assuming that the bill is passed without further amendment, the new laws will not operate retrospectively and will only apply to new standard form business contracts (including renewals of existing contracts) entered into after the laws commence.

Time to act

Businesses seeking to ensure their standard form business agreements are not vulnerable to challenge under the new laws should revise those agreements now. This is the case for all businesses, however, franchisors and suppliers of finance contracts, telecommunications contracts and software licences should be particularly concerned.

For more specific information on any of the material contained in this article please contact Johanna Churchill on +61 8 8210 1236 or