UNFAIR CONTRACT TERMS IN COMMERCIAL AGREEMENTS
In Australia there is generally the rule that parties have the freedom to agree on whatever terms of contract they like, no matter how unfair. However, this freedom is subject to laws relating to unfair contract terms. The unfair contract terms laws apply to standard form contracts with small businesses. Few industries use standard form contracts as often as the trade and logistics industry. It is crucial that you understand how the unfair contract terms laws affects your business.
What types of contracts are covered?
The contracts must be a “standard form contract”. This is not a defined term, but generally means a contract presented on a take it or leave it basis. Contracts on the back of an invoice, quote or purchase order or terms and conditions on your website are examples of a standard for contract.
What is a small businesses?
Currently the definition of a small business is one with less than 20 employees. However, the Government has foreshadowed increasing this employee limit to 100. Another foreshadowed change is including businesses with a turnover of less than 10 million in the definition of a small business.
What is an unfair term?
The legislative test of an unfair term looks at 3 factors:
Would the term cause a significant imbalance in the parties’ rights and obligations
Is the term reasonably necessary to protect the legitimate interests of the advantaged party; and
would the term cause detriment to the small business if relied on?
Cases to date show that the Courts will find the following clauses unfair:
clauses that significantly exclude a party’s liability;
wide indemnity clauses, particularly those which require the customer to indemnify the advantaged party for that party’s own negligence;
clauses that allow the advantaged party to unilaterally change the terms of the contract; and
more generally, clauses that give one party a right without granting reciprocal rights to the other party.
How does this impact the customs, trade and transport industry?
The unfair contract provisions are subject to a major exclusion which impacts the transport industry. The unfair contract terms laws do not apply to contracts for the international transport of goods by sea. This means that terms under a bill of lading will not be covered. However, this exemption does not extend to:
transport by air, rail or road;
quarantine advice; and
Many of the above services will be covered by standard form contracts. It is also not uncommon for these contracts to contain one sided clauses that a customer may argue is unfair.
What if terms are unfair?
An unfair term can be declared void. This means that the clause cannot be enforce. The contract continues without the inclusion of the void clause. The Government has foreshadowed legislative change to allow Courts to impose fines where a party includes unfair contract terms. However, currently, penalties do not apply.
It is important to note that the legislation does not look at how the term was used. Terms have been declared void despite that term not being applied unfairly or the customer suffering loss.
Additionally, Courts will not rewrite a contract to make an unfair term fair. For instance, if a Court is considering a wide indemnity clause, it will not narrow that clause so that it does not apply to losses outside of the control of the customer.
What to do
Most businesses will use standard form contracts. It is important for companies to review those contracts and consider whether a Court may consider any of those terms unfair. If there is a risk that a term is unfair, consider whether the term can be made more even, while at the same time, providing similar levels of protection. Historically, terms are drafted in a very one-sided manner without consideration as to whether that wording is necessary.
As Courts will not rewrite the term, companies must proactively do this. It will usually be better to have an enforceable, but fairer, term, than a term than sounds strong, but is unenforceable.
CGT Law specialise in drafting terms for the customs, transport and logistic sector. In drafting terms, we consider how the unfair contract terms apply uniquely to the customs and transport sector. In particular, we use our industry knowledge to identify where a term is necessary to protect a legitimate interest and alternatively, where a Court may find a clause to be unfair.