Under the Australian Consumer Law (i.e. Competition and Consumer Act 2010, Schedule 2, s 23) a contract term can be made void if it is found by a court to be unfair. These provisions apply to standard form contracts used in consumer contracts for financial products or financial services. They do not apply to contracts entered into for commercial purposes.
What is a standard form contract?
Generally, a standard form contract is one that has been prepared by one party to the contract (i.e. the supplier. These contracts are not subject to negotiation between the parties and the party who has not prepared the contract has no real bargaining power. They can only accept the contract as it is or not enter into it at all.
Such contracts are used extensively in consumer transactions and examples include contracts for:
- Telecommunications
- Finance e.g. banking services, loans, credit cards
- Domestic building
- Gyms
- Motor vehicles
- Travel
- Utilities
Insurance contracts regulated under the Insurance Contracts Act 1984 are not covered by these provisions. However, private health insurance contracts and state and Commonwealth government insurance contracts are not regulated by the Insurance Contracts Act 1984 so they are subject to the unfair contract terms provisions.
When can a term be declared unfair?
A term will be declared unfair if it can be established that a term in such a contract:
- will result in a significant imbalance in the parties’ rights and obligations; AND
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; AND
- would cause detriment (either financial or otherwise) to a party if it were to be relied on.
All three conditions (i.e. ‘signficant imbalance’, ‘not reasonably necessary’ and ‘cause detriment’) must be met before a court will decide a term is unfair.
Examples of an unfair term include:
- a term that permits one party (but not the other) to avoid or limit performance of the contract;
- a term that permits one party (but not the other) to terminate the contract;
- a term that penalises one party (but not the other) for a breach or termination of the contract.
[see Competition and Consumer Act 2010, Schedule 2, s 25]
Only a court has the power to determine whether a contract term is unfair.
What happens if a term is found unfair?
Although a court may find a particular term to be unfair this results only in the term itself being void (i.e. it will be treated as if it never existed). However, the contract itself will continue to be binding if it is capable of operating without the unfair term.
Terms excluded from the unfair terms provisions
The following terms are excluded from the unfair terms provisions [s 26]:
- Terms that define the main subject matter of a contract – that is, the goods or services (including financial services or products) that the consumer is purchasing under the contract. It can also include a term that is necessary for the supply of goods or services to occur e.g. where a consumer agrees to buy a product online and to have it delivered by post, they cannot later challenge the delivery term as unfair, because it was necessary for the supply of the item they agreed to purchase.
- Terms that set the upfront price payable under the contract – that is, the amount the consumer agrees to pay under the contract for the supply of the goods or services.
What to do if you think a consumer contract term is unfair?
- You can make a complaint to the ACCC or ASIC (in the case of financial services and products). However, whilst the ACCC or ASIC can seek the cooperation of businesses in removing unfair contract terms they do not have the power to state whether a contract term is unfair – this is a matter for the courts.
- In the case of a contract concerning financial services, you can make a complaint directly to the financial services provider concerned. If they cannot resolve your complaint, seek the assistance of the Financial Ombudsman Service (FOS) or the Credit Ombudsman Service Ltd (COSL).
Lodging legal action
Determining the appropriate court and jurisdiction in which to lodge an unfair contract term action can be a complex matter. Legal advice should be sought if you wish to pursue an applicaton to have a contract term declared unfair.
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