A contract is a legally enforceable agreement made between two or more people. It exists when one party makes an offer and the other party accepts it.
It can be verbal or written, but it's a good idea to have a written contract so that everyone is clear about the terms. When a contract is verbal it can be difficult to prove what was agreed to or even that a contract existed.
Contracts can be entered into in lots of different ways, such as:
- you sign a document that clearly describes itself as an agreement or a contract
- you agree to something over the phone
- you click on an "I agree" button on a website.
Sometimes contracts are unfair, particularly if one party has all the bargaining power and the other party feels like they have no option but to agree.
Most contracts that consumers enter into are what's known as 'standard form contracts', where the terms are much the same for all people who sign them. But these types of contracts can contain unfair contract terms, as they're prepared by one party and are usually offered to consumers on a take it or leave it basis. For example, gym membership contracts have long been a source of unfair contract terms.
Here's how to know if a contract term is unfair, and what to do about it.
Up to 1 January 2011, consumers had some protection against unfair contracts under the laws that dealt with unconscionable conduct and with misleading or deceptive conduct.
But since 1 January 2011, the Australian Consumer Law ("ACL") has provided more consumer protection by giving Courts the power to find that a term of a 'standard form consumer contract' is unfair. If a term is found to be unfair, it will be void, which means that it is no longer enforceable.
- Consumer contracts are defined as contracts for the supply of goods or services, or the sale or grant of an interest in land, for personal, domestic or household use or consumption.
- There's no definition of standard form consumer contract, but these will usually be contracts that are used in high volume situations where the terms for each consumer are going to be fairly similar. For example, gym memberships, mobile phone plans, motor vehicle sales or hire, home building, water, gas and electricity supplies, credit cards, flights, and concert ticketing.
Who decides if a contract is a standard form contract?
If a consumer says that a contract is a standard form contract, there's a presumption that the contract is a standard form contract unless the business can prove otherwise. A court will consider the following matters:
- Whether one of the parties has all or most of the bargaining power.
- Whether the contract was prepared by one of the parties before there was any discussion between the parties.
- Whether the other party had to accept or reject the terms of the contract in the form they were presented.
- Whether the other party was given a real opportunity to negotiate the terms.
- Whether the contract terms take into account the specific characteristics of the other party or the particular transaction.
Contracts that are exempt from unfair term laws
There are some contracts that are exempt from the unfair contract term laws:
- Contracts for the shipping of goods.
- Contracts for marine salvage or towage.
- Ship charter parties.
- Contracts that are constitutions of bodies such as companies and managed investment schemes.
- Contracts covered by the Insurance Contracts Act, such as car insurance, consumer credit insurance and home and contents insurance (but this doesn't include private health insurance contracts, government insurance contracts and re-insurance contracts).
A term of a standard form consumer contract will be unfair if:
- it will cause a significant imbalance in the parties' rights, and
- it is not reasonably necessary to protect the business's rights, and
- it will cause detriment (financial or otherwise) to the consumer.
A court will look at whether the term is expressed in plain language, legible, presented clearly and available to the parties, and not in a separate document that no one gets to see.
If a court finds that a term is unfair, it is void. This means it is treated as if it never existed. If the contract can still work without the term, then it will do so and the parties will still be bound by the contract.
There are some terms which are exempt from the unfair contract terms laws:
- Terms that define the main subject matter of a contract. So a consumer can't say that a contract is unfair because they have changed their mind about what they have agreed to buy.
- Terms that set the up-front price payable under the contract, provided the price was disclosed before the contract was entered into. But this won't include fees and charges imposed as a result of something happening during the period of the contract.
- Terms that are required or permitted by another law.
The ACL gives some examples of the types of standard form terms that might be unfair. These terms can still be included in contracts, but businesses should be careful because in some circumstances they will be unfair.
These examples below are not exhaustive – so there could be other types of terms that will be unfair.
The government is also looking at strengthening consumer rights when it comes to unfair contract terms, so changes may be on the way.
1. Allows one party to get out of its obligations
A term that allows a business to wiggle out of its obligations under a contract whenever it likes and without any penalty will potentially cause a great imbalance between the parties. However, it would be OK if a consumer understands how they'll be affected and is given reasonable notice, or if the term is permitted by law, like a limitation on liability for recreational services.
For example, a clause along the lines of the following would potentially be unfair: "We may at any time and without notice and at our absolute discretion suspend or disconnect your service." It would be better if the term included a reason for possible termination, like fraudulent or illegal use of a service.
2. Allows one party to cancel the contract
A term that:
- allows a business to cancel a contract for a minor breach by a consumer will probably be considered unfair. For example, a clause along these lines will be too broad – "Breach of any term of this contract will lead to immediate termination".
- restricts a consumer's right to cancel a contract may be unfair, for example, a term which locks a consumer into a contract no matter how poor the business's conduct.
3. Allows one party to penalise for breach or termination of the contract
A term which:
- penalises a consumer for a minor breach may be unfair
- threatens penalties above what's reasonable may also be unfair. For example, a late payment fee should relate to the actual costs incurred by the business
- penalises a consumer for cancelling a contract where the business couldn't complete its obligations is likely to be unfair
- doesn't allow a consumer to get a refund where the business doesn't complete its obligations is likely to be unfair.
4. Allows one party to change the terms of the contract
A term that allows a business to change the terms without the consumer's consent is likely to be unfair.
For example, a term that makes the consumer pay more or get less than originally agreed will probably be unfair.
This type of term must be balanced by allowing the consumer to get out of the contract or to give consent before the changes come into effect.
5. Allows one party to renew or not renew the contract
A consumer may be put in a difficult position if a business is allowed to renew or not renew a contract without the consumer's consent.
For example, if a contract is a continuing contract (like phone or internet access) and the business decides not to renew the contract without telling the consumer, the consumer will probably suffer inconvenience and cost as a result of the surprise loss of the service.
Or if a contract is automatically renewed without giving the consumer notice, the consumer might not have the chance to move to a better or cheaper service provider.
A term that allows a business to change the contract terms without the consumer's consent is likely to be unfair.
6. Allows one party to change the upfront price payable
Usually, a consumer would not expect a business to change one of the most fundamental terms of a contract – the price for goods or services.
If a business changes such an important part of the contract, you'd expect that the consumer should have the right to end the contract.
However, there might be some circumstances where this type of term is not unfair.
For example, in the case of a building contract where the consumer can choose different materials, it's reasonable to expect the builder to change the cost.
7. Allows one party to change the types of goods or services to be supplied
It's a bit rough to sign up for a particular product or service and get something inferior instead, and be told it still complies with the contract because the business can change what's supplied.
This might happen in the case of, say, a mobile phone plan, where the exact model is no longer available.
If the substitute is of similar quality, then there is usually no problem.
Such a term should include some qualification so that the consumer knows when and how a variation might be made.
The consumer should also be given the right to cancel if the business can't supply the product or service or an appropriate replacement.
8. Allows one party to decide whether the contract has been breached or to interpret the meaning of the contract
A term that allows a business to decide for itself whether or not the contact has been breached will probably be unfair as this might allow a business to get out of its obligations to the consumer.
9. Limits one party's liability for its agent's representations
A term that tries to get out of responsibility for representations made by employees or its agents will probably be unfair, especially in the case of really long and complicated contracts that need some explanation by an employee or agent.
For example, a clause such as the following might be unfair: "You acknowledge that you enter into this agreement as a result of your own enquiries and you do not rely on any statement, representation or promise made by us or by our agents not expressly set out in this agreement".
10. Allows one party to sign over the contract to someone else without the other party's consent
If a business is sold and its contracts with customers are given to the new owner of the business, consumers should not find themselves in a worse situation.
11. Limits one party's right to sue the other party
Limiting a consumer's right to sue a business for breach of a contract might allow the business to act in an unreasonable way towards the consumer as the business is not worried about the legal consequences. This is likely to be considered unfair.
12. Restricts the evidence one party can use
- A term that restricts the amount or type of evidence a consumer can present in court proceedings may be unfair because it limits their legal rights. This might discourage the consumer from taking legal action against a business.
- It may also be unfair to make a consumer bear the burden of evidence (proof), especially if they have to get access to the business's records to do so.
The unfair contract terms laws for goods and services are enforced by the ACCC and the state and territory consumer protection agencies. Unfair contract term laws in the ASIC Act for financial services and products are enforced by ASIC.
If you think that a contract term is unfair, the first thing to do is to raise it with the business itself.
- If you have a chance before you enter into the contract, you may be able to negotiate a different term.
- If you feel like you had no choice but to enter into the agreement, and you are then in a situation where you have to comply with an unfair term, tell the business that you think it's unfair and why.
- Send an email or letter so that your complaint is in writing. If you can't get anywhere with the business, contact your state or territory consumer protection agency.
It is up to a Court or a Tribunal to decide whether a term is unfair. The ACCC and ASIC can apply to a court to seek orders on behalf of a consumer or a group of consumers. Consumers can also take their own private action in a Court or Tribunal to enforce their rights or seek loss or damages.
It's also possible for an unfair contract term dispute to be settled through dispute resolution.
Contracts have terms and conditions that set out the rights and responsibilities of each party.
- Take time to read the contract – ask if you can take it away.
- Make sure you read through the contract and understand everything, especially the fine print.
- If you don't understand something, ask!
- If you still don't understand something, or if you are unsure about anything, seek legal advice.
- Don't sign a contract because you feel pressured into it.
- Make sure there aren't any blank spaces in the contract – these might be filled in later and you won't know what has been added.
- If any changes are made to the contract these should be signed or initialed so it is clear that all parties have agreed.
- Make sure you get a copy of the contract.
Once a contract has been agreed to, you're usually stuck with it. If one of the parties wants to change the conditions or get out of the contract, they might have to pay a penalty to cover any losses suffered by the other party.
Sometimes you can get out of a contract without penalty, such as if it's within a cooling-off period if the sale was a door-to-door or telemarketing sale, or if the seller has engaged in misleading and deceptive conduct or unconscionable conduct.
Stock images: Getty, unless otherwise stated.