Beware of unfair or prejudicial contract provisions

In brief - Whether you are a supplier or a customer, here are some tips about contract clauses to watch out for

The courts have the power to declare that a contract condition is void and unenforceable if judged to be "unfair". To be "unfair", a condition 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 to the other party if it were relied on.

In deciding whether a condition 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 consider other relevant matters.

A condition may be unfair in a wide variety of contracts made with a "small business" or involving a "standard form consumer contract" - based on definitions in the Australian Consumer Law. 

Suppliers to small businesses or who use standard form business contracts need to beware of the risk that parts of their contracts might end up being considered by a court and possibly held unenforceable. The risks include serious business disruption and legal costs, and the supplier finding itself still bound by the rest of the contract.

Or where you are a customer of any size it is informative to be on the lookout for proposed contract provisions of the types that the courts have said were inherently or prima facie unfair. The irony is that it would usually not be practicable for a small business or a consumer to try to get particular contract provisions declared unfair; and larger businesses have to fend for themselves anyway and, broadly speaking, will be stuck with whatever contract they sign whether it is unfair or not.

Unfair contract conditions - examples 

We now have a long list of examples of unfair contract conditions from a consent judgment that the ACCC has just obtained against Fujifilm Business Innovation Australia (what follows isn’t even the full list).

• Right for the supplier to unilaterally vary some terms.

• Binding the customer to pay, even if the supplier finds itself prevented from timely supply.

• Automatic contract renewals unless the customer gives advance notice of termination.

• Customer indemnifying the supplier for costs and expenses associated with the supplier.

• Right for the supplier to unilaterally vary charges.

• Forced acknowledgement that the customer has read all contract documents – even including documents referred to but not actually given to the customer.

• Significant caps, reductions or limits on the supplier's total liability, but no such limits on customer liability.

• Supplier rights to terminate but no corresponding rights for the customer.

• Right for the supplier to suspend supply if the customer is in breach in any way but with the customer still being obliged to continue payments.

• Right for the supplier to terminate for any breach by the customer no matter how insignificant.

• Obligation for the customer to still pay the unpaid fees for the balance of the contract plus break costs and any other expenses incurred by the supplier, if the supplier terminates for any reason.

• One-way force majeure clause - supplier excused from supply but the customer not excused from payments or anything else.

• Right for the supplier to assign the contract but no right for the customer to do so.

• Forced acknowledgement that the customer has not relied on anything not written in the contract.

Recognise any of these? If you deal with contracts in any way, you probably should have these on your checklist.

Some are plainly and inherently likely to be unfair. 

Some are unfair because if they were going to be there, they at least should have been reciprocal.

Some might be a little surprising to suppliers (noting that it did not matter that in some cases the clauses already required the supplier to act "reasonably").

Although it didn't arise in the Fujifilm case, there is an overlapping consideration for suppliers dealing with companies or individuals who meet the definition of "consumers" and who are located in NSW. It doesn't matter where the supplier itself is situated.

Those suppliers are liable to penalty if they don't make advance disclosure of terms of the proposed contract that are "substantially prejudicial" to the interests of the consumer.

We don't have a complete definition of when a contract term is going to be regarded as "substantially prejudicial", but the legislation says that may include:

• exclusion of liability for the supplier;

• making the customer liable for damage to goods as delivered;

• permission to pass on consumer data that might identify the consumer; or

• a requirement for the consumer to pay an exit fee, balloon payment or similar.

We also don't have clear details of what is required to meet that disclosure requirement. Most likely it requires sufficient steps so the consumer is actually aware of the particular condition and able to understand the significance. 

It is likely that the types of conditions held to be unfair in the Fujifilm case could also be regarded as "substantially prejudicial". On the other hand, a condition in a consumer contract could still be declared unfair and unenforceable even if there has been disclosure.