10 Dec 2015

Unfair contract term protections: tips for the IT industry

by Sharon Segal

With protections being extended to small business in late 2016, suppliers in the IT industry should be reviewing their B2B standard form contracts now for unfair terms.

Legislation has been enacted to extend the unfair contract term protections in the Australian Consumer Law to small businesses. These protections will apply to any standard form contracts between businesses where at least one of businesses has fewer than 20 employees and the contract value does not exceed $300,000, or $1,000,000 if the contract period is more than one year.

With standard form contracts being a regular feature in the IT industry, in particular for businesses operating online, suppliers in the IT industry should be carefully reviewing their online terms and other B2B standard form contracts to ensure they comply with the new protections.

What are the new protections?

The protections for standard form small business contracts will work in the same way as those that currently exist under the Australian Consumer Law for standard form consumer contracts. Courts will have the power to declare that a term in a standard form small business contract is "unfair" and therefore void. The remaining terms of the contract will continue in force if the contract is capable of operating without the unfair term.

The new protections will apply to standard form small business contracts entered into or renewed, or terms of existing contracts that are varied, on or after 12 November 2016. The protections will not apply to small business contracts entered into before that date.

What are unfair contract terms?

A contract term is "unfair" if it: 

  • causes a significant imbalance in the parties' rights and obligations arising under the contract;
  • is not reasonably necessary in order to protect the legitimate interests of the party which would be advantaged by the term; and 
  • would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. 

The decision as to whether a contract term is void for unfairness needs to be made by a court; businesses will not be able to unilaterally declare that a contract term is unfair. The Australian Competition and Consumer Commission (ACCC) or the small business party to the contract will be able to apply to the court for a declaration that a term of the contract is unfair. If the court makes the declaration, it will be a contravention of the Australian Consumer Law for the other party to subsequently seek to apply or rely on the unfair term.

The test for "unfairness" requires a factual assessment of the relevant circumstances. In determining whether a term is unfair, the court will take into account: 

  • the extent to which the term is "transparent" ‒ which refers to whether the term is expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term); and
  • the contract as a whole ‒ in other words, the term cannot be considered in isolation, but must be assessed in light of the contract as a whole. 

There is a statutory presumption that a clause in a standard term contract is not reasonably necessary and the burden is on the party seeking to rely upon the term to show that it is. Terms that merely define the main subject matter of the contract or set the upfront price of a contract cannot be declared unfair.

Unfair terms in IT contracts

Key areas where there is potential for a contract to be challenged include:

  • terms that permit a supplier to suspend or terminate services being provided to the consumer, in particular without a requirement to notify the customer in advance;
  • terms that unfairly restrict the customer’s termination rights: for example, by imposing an early termination fee or onerous pre-conditions for exercising a right to terminate
  • terms that allow the supplier to unilaterally vary the contract, in particular if there is no right for the customer to reject the change or exit the contract: for example, rights to increase fees
  • terms which exclude a supplier's liability under the contract: for example, a release of liability for negligence on the part of the supplier
  • terms that make the customer liable for things that would ordinarily be outside of their control: for example, requiring the customer to indemnify the supplier for circumstances caused by the supplier.

What should businesses do to get ready?

As the new protections will take effect in November 2016, businesses have 12 months to get ready. Businesses should be identifying all of their standard form contracts which could potentially be entered into with a small business and have a contract value which is less than the prescribed amounts. Any standard form consumer contracts which have not already been reviewed for unfair contract terms should also be identified as part of this process.

Each relevant contact should be carefully reviewed to identify potentially unfair terms. Terms which are clearly unfair should be removed, with the business making a call about whether or not to remove other possibly unfair terms. Businesses may decide to make these changes to all of its standard form contracts or to maintain two sets of documents ‒ one which will be used for low value contracts with small businesses, and one for other B2B contracts (which will not be caught by the new laws).

While the new protections will not apply retrospectively, they will apply to any renewed standard form small business contracts. Businesses may therefore also wish to identify now any existing contracts which could be caught if they are renewed.

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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.