The Australian government has passed legislation which will have the effect of extending protection against unfair terms in standard form contracts beyond consumers to Australian small businesses from 12 November 2016.

The Competition and Consumer Act 2010 (Cth) has provided protection to consumers against the inequities which can result from unfair contract terms being unilaterally imposed in standard form contracts.  In 2015, the Australian federal government engaged in a public consultation process to ascertain whether small businesses, like consumers, were vulnerable to the inclusion of unfair terms in standard contracts.  The result of the consultation highlighted that Australian small businesses underestimated the risks contained in standard form contracts and that they, like consumers, should benefit from legislative protection against contractually unfair terms.  The legislation can also apply where the goods or services have been provided within Australia

There are a number of elements which need to be satisfied in order for the provisions of the legislation to apply.  These elements are:

  1. At least one of the parties to the contract must be a small business. A small business is one which employs fewer than 20 people at the time the contract is entered into.  This includes casual staff who are employed on a regular or systemic basis as opposed to those who may for example, be employed to overcome seasonal demands.
  2. The value of the contract at the time it is entered into must not exceed AUD$300,000 (where the contract is for a period of less than 12 months) or AUD$1,000,000 (where the contract exceeds 12 months).
  3. The contract must be in the nature of a standard form contract. This term is not actually defined in the legislation but it is often referred to as ‘a take it or leave it’ contract.  The legislation is not intended to cover contracts which require some degree of diligence in considering its terms and retains the need for small business to undertake due diligence in the case of agreeing high value contracts or those necessarily the subject of individual negotiation.  Other factors which may be considered in order to ascertain whether a contract is of a standard form nature are:
  • Whether one of the parties either had the ability to accept or reject the terms;
  • Whether one of the parties had all or most of the bargaining power in concluding the contract;
  • Whether the terms of the contract took into account the specific characteristics of the other party;

As a rule of thumb, a contract which requires automatic acceptance without the opportunity to negotiate or discuss the terms of the contract will constitute a standard form contract.

Certain contracts are excluded, these include contracts of marine salvage or towage, the charterparty of a ship and a contract for carriage of goods by ship.  This means, therefore, that a freight forwarder’s terms and conditions which extend the period of carriage beyond the sea leg and include a land component by road or rail, may be caught by the provisions of the unfair contract terms legislation.  Where, however, terms are imposed by law, for example in Australia airway bills have the benefit of time and package limitations imposed by virtue of the Civil Aviation (Carriers’ Liability) Act 1959, such terms will not be considered to be unfair.

When will a small business contract term be considered to be unfair?  A term of a contract could be considered unfair if it:

  • Would cause a significant imbalance in the rights of the parties and their obligations;
  • It is not reasonably necessary to protect the legitimate interests of the party who obtained the benefit of the term;
  • Would cause detriment financial or otherwise if it were to be applied or relied upon.

For example, a term in a freight forwarder’s bill of lading preventing the carriage of dangerous goods without authorisation or notice may not in the circumstances be considered dangerous where the purpose of such a term is to protect broader safety considerations.

There are other considerations which may be taken into account in order to determine whether or not a contract term is unfair.  Firstly, whether the term is transparent and this includes whether the terms themselves are written in plain language, legibly and readily available to the other contracting party.  Regard may also be had to the contract as a whole and whether, for example, a potentially unfair term is counterbalanced by additional benefits being offered to the other party to the contract.

A party who seeks to assert a contract term is unfair may either make an application to an Australian court or an agency such as the Australian Competition and Consumer Commission (ACCC) to lodge a complaint.  The ACCC, however, would be more likely to take action when it will address a wider public interest and is one which is commensurate with its objective of creating fair and transparent markets.  Should a contract term be declared unfair, a court may order that the term be declared void and the balance of the contract will remain on foot.  Alternatively, a court may refuse to enforce a contract or direct a refund or the re-performance of services.

The legislation will apply to contracts entered into or renewed after 12 November 2016 and to contract terms varied after that date.  At this stage, until there has been some judicial consideration of the application of this legislation, it is uncertain whether standard terms and conditions which contain typical exclusions for damage incurred during transport, reliance on package limitations and time limitations for notifying claims will be considered unfair.  These terms and conditions are typical to the transport and logistics sector and given the carve out specifically for shipping contracts it remains to be judicially tested as to whether there is any basis for identifying these terms as unfair.

Alexis Cahalan

Davies Johnson Pty Ltd, Level 10, 117 York Street, Sydney, NSW 2000 Australia
Tel: +61 (0)2 8262 5850
info@daviesjohnson.com