Relationships with your Customers & Clients - Unfair Contracts

Posted by Malcolm Campbell on 11 May 2016
Relationships with your Customers & Clients - Unfair Contracts

In our blog published on 4 May 2016 we covered the importance of ensuring you have clear and concise contracts in place with all of your customers/clients before doing business with them.

In this blog we look at whether the contracts you may put to your clients are fair and capable of being enforced.

Whilst businesses often use standard form contracts to improve efficiency, they must be wary of the law regarding unfair contract terms. There are already laws in place protecting consumers from unfair terms in circumstances where they have little or no opportunity to negotiate with businesses, such as with standard form contracts. However the Unfair Contract laws will be extended to protect “small businesses” from unfair terms in ‘standard form’ contracts laws on 12 November 2016.

The law will apply to a standard form contract entered into or renewed on or after 12 November 2016, where:

  • it is for the supply of goods or services or the sale or grant of an interest in land;

  • at least one of the parties is a small business (employs less than 20 people, including casual employees employed on a regular and systematic basis); and

  • the upfront price payable under the contract is no more than $300 000 or $1 million if the contract is for more than 12 months.

If a contract is varied on or after 12 November 2016, the law will apply to the varied terms.

A standard form contract is one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms – that is, it is offered on a ‘take it or leave it’ basis. While most standard form contracts and contractual terms will be covered by the unfair contract terms law, there are a number of exceptions.

To be ‘unfair’, a term must:

  • cause a significant imbalance in the parties’ rights and obligations; and

  • 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.

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.

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 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.

The law sets out examples of terms that may be unfair, including:

  • terms that enable one party (but not another) to avoid or limit their obligations under the contract’

  • terms that enable one party (but not another) to terminate the contract;

  • terms that penalise one party (but not another) for breaching or terminating the contract;

  • terms that enable one party (but not another) to vary the terms of the contract.

If a court or tribunal finds that a term is ‘unfair’, the term will be void the rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

As you can see there is a lot to ensuring that your standard ‘terms & conditions’ are simple, efficient but also effective and are not likely to be void due to being unfair.

We specialise in providing clarity and confidence to business operators in their legal relationships with their customers and clients. If you think your ‘standard’ Terms & Conditions need reviewing before the new law comes into operation, or if you need to put some ‘fair’ Terms & Conditions in place contact us today.