12 May 2009

Revolution in contract law covers business contracts as well as consumer contracts

by Steven Klimt, Narelle Smythe, Randal Dennings, Michael Corrigan, Linda Evans, Kirsten Webb, Stuart Clark, Robert Cutler

The Federal Government's draft unfair contract terms law released yesterday for public comment will affect not only contracts entered into with consumers, but contracts between businesses, so many businesses across Australia will need to review all their standard-form contracts soon.

Not all business-to-business contracts will be subject to the legislation. For example any negotiation of terms (apart from up-front price) will remove a transaction from the scope of the provisions. In any business-to-business context there might not be a "significant imbalance in the parties' rights and obligations arising under the contract" and it may be difficult to show that a term was not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.

Nevertheless, this still leaves a very large scope of application for the provisions to standard-form contracts between businesses, for example, lending and financial services contracts, utilities supply contracts for water, gas, electricity, telecommunications, standard-form purchase contracts and standard-form supply contracts between businesses.

What is an unfair contract term?

Under the draft provisions, an unfair term of a standard-form contract is void.

"Standard form contract" is not defined but factors are listed. For example, all contracts with pre-prepared terms which are not negotiated (leaving aside up-front pricing) and are presented on a "take it or leave it" basis will be covered (but contracts of employment are not covered).

A term is unfair if:

  • it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
  • the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

The Court will presume that a term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it, unless that party can prove otherwise.

In determining whether a term is unfair, a court may take into account any matters it thinks relevant, but must take into account the following matters:

  • the extent to which the term would cause, or there is a substantial likelihood that it would cause, detriment (financial or otherwise) to a party if the term were to be relied on;
  • the extent to which the term is transparent (is it in plain language, legible, presented clearly and readily available to any party affected by the term); and
  • the contract considered as a whole.

Examples of types of terms that may be unfair include:

  • a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract or to terminate the contract;
  • a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract or the characteristics of the goods or services to be supplied under the contract; or
  • a term that permits, or has the effect of permitting, one party (but not another party) to renew the contract or to vary the upfront price payable under the contract without the other party being able to terminate the contract.

Consultation and implementation

The exposure draft legislation is only open for consultation for a very short period, closing on 22 May 2009. The Government's intention is that the unfair contract terms provisions will be introduced into Parliament in June. Once passed by the House of Representatives, the Bill will be referred to a Senate Committee to allow further scrutiny and consultation.

Once the Bill has been passed by both Houses, the Government plans for it to commence on 1 January 2010 at the Commonwealth level (with the same coverage that the Trade Practices Act and the ASIC Act now have). States and Territories will be able to apply the provisions in their jurisdictions throughout 2010.

If you have any queries about the proposed legislation or would like help in formulating a submission on it before the deadline of 22 May 2009, please contact your nearest Clayton Utz partner.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.