Australian Consumer Law Update: Extending Unfair Contract Term Laws to Small Businesses


The Australian Consumer Law (ACL), which commenced in Australia on 1 January 2011, introduced new laws relating to unfair contract terms.  Under the ACL, courts can declare void those terms in standard consumer contracts that are “unfair”.  The rationale for the ACL is to protect consumers from unfair contract terms and encourage the adoption of “fair” contract terms.

The Australian Government is now proposing to extend the existing consumer unfair contract term protections for standard form contracts tosmall businesses.  In this regard, a consultation paper titled “Extending Unfair Contract Term Protections to Small Businesses” was released on 23 May 2014.

What is a “standard form contract”?

The unfair contract laws do not define “standard form contract”.  However, broadly, a standard form contract will typically be one that has been prepared by one party to the contract and is not subject to negotiation between the parties, which is the case, in particular, with many standard terms of trade.

When is a term “unfair”?

A term is unfair when:

  • it causes significant imbalance in the parties’ rights and obligations arising under the contract;
  • it is not reasonably necessary to protect the legitimate interests of the business; and
  • it would cause detriment to another party if it were to be applied or relied on.

Examples of unfair terms in consumer contracts

Terms that may be regarded as unfair in consumer standard form contracts may include the following:

  • terms that permit the supplier but not the customer to avoid or limit the performance of the contract, terminate it, vary its terms or renew or not to renew the contract;
  • terms that permit the supplier to:
    • change prices without the customer’s right to terminate the contract (lock in terms);
    • unilaterally determine when the contract has been breached;
    • unilaterally vary the characteristics of the goods or services to be supplied; and
    • assign the contract to the customer’s detriment without the customer’s consent.
  • terms that penalise the customer but not the supplier, for breach or termination of contract;
  • terms that limit the customer’s right to sue the supplier; and
  • terms that limit the supplier’s explicit liability for its agents.

Why the need for reform?

It is perceived that consumers and small businesses may experience similar situations and behaviours.  Large businesses may present them with standard form contracts and, like consumers, they may lack the time and legal or technical expertise to critically analyse these contracts, and the power to negotiate.  In some circumstances, these standard form contracts may be used to further enhance or embed the commercial advantage or dominance of the other party well beyond reasonable legitimate commercial interests.

The consultation paper states that “a legal framework that appropriately addresses unfair contracts terms should ensure that businesses that supply small business compete with each other on price and quality without passing inappropriate levels and types of risk to their small business counterparties…In turn, this should stimulate innovation and growth by efficient small businesses that would then be able to compete with larger businesses on a level playing field.”

Next steps

The consultation paper was released on 23 May 2014 and is open for submissions until 1 August 2014.  We consider it likely that reforms will be implemented.  However, it will be interesting to see:

  • how “small businesses” will be defined in any new legislation;
  • whether the new legislation specifically identifies the types of contracts to which it applies;
  • whether the unfair contract term protections will apply to large business contracts with small businesses, or to also include small business to small business contracts; and
  • whether the unfair contract term protections will be extended to contracts for financial products and services.

We will keep a close eye on this and provide timely updates.  In any event, now is probably a good opportunity for businesses to review their standard terms and conditions and other standard form contracts in order to highlight potential problem areas.

For more information on this update or any other corporations law matters please contact Emma Leys on (08) 9321 3755.

The information published on this website is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.