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You are here: Home / News / Business & Commercial / The Validity of Unfair Terms of a Contract

28/05/2014

The Validity of Unfair Terms of a Contract

In 2010 the Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 2010 (Cth) came into operation to address unfair contract terms in consumer contracts.

How does it apply?

The law applies only to consumer contracts. This means that at least one of the parties to the contract must be an individual who acquires a product or service predominantly for personal, domestic or household use or consumption.

The unfair contract term provisions apply only to “standard form” consumer contracts which are contracts commonly used in many industries such as finance, domestic building, utilities and telecommunications. Although the legislation does not define what is meant by a “standard form contract”, generally speaking, it is one that has been prepared by one of the parties that contains a set of generic terms and conditions and is not subject to negotiation.

What is an unfair contract?

A court will find a term to be unfair if the following three conditions are met:

  • It would cause a significant imbalance in the parties’ rights and obligations arising under the contract (i.e. it favours the business over the consumer); and
  • It is not reasonably necessary in order to protect the legitimate interests of the business; and
  • It would cause detriment (financial or otherwise) to the consumer if it were to be enforced or relied on.

In deciding whether or not a term is unfair, a court will also take into account the contract as a whole i.e. in reference to the other terms of the contract, as well as how the term was expressed in the contract i.e. if it was presented clearly and in reasonably plain language.

Under the provisions, if a court finds that a term of a contract is unfair, the term will be void meaning that it will not be binding on the individual. However, the contract will continue to bind the parties if it is capable of operating without the unfair term.

The ACCC recently undertook an industry review and released their report, ‘Unfair Contract Terms Industry Review Outcomes’ in March 2013, identifying a number of problematic terms in standard consumer contracts. The ACCC also warned of possible enforcement actions against businesses that have chosen not to address problematic terms in their standard form contracts.

In July 2013 in proceedings instituted by the ACCC, the Federal Court declared that a number of clauses in the standard form consumer contracts of an internet service provider were unfair and therefore void.  This marked the first successful legal proceeding based exclusively on the unfair contract term provisions.

Contact us to find out more or to arrange a consultation with an experienced contracts lawyer in Sydney CBD.

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