The risks of 'unfair' contract terms

Agents seeking to assist their clients by including specially tailored terms in a contract of sale or a tenancy agreement run the risk that the term might be regarded as “unfair” and, as a consequence, void, and expose the agent and his or her agency to significant pecuniary penalties.

New amendments to the Australian Consumer Law (ACL)

The ACL has forbidden, since its inception in 2010, agents engaging in “unconscionable conduct” in connection with the supply of their services,[1] and prohibited the making of false and misleading representations about goods, services or the sale of land.[2] The reach of the ACL was extended, on  9 November 2023, to include amendments prohibiting the inclusion of “unfair terms” in “consumer contracts” and “small business contracts”.[3]

Prohibition on unfair terms

Section 23 of the ACL provides that a term of a “consumer contract” or a “small business contract” is void if:

1. the term is unfair; and
2. the contract is a “standard form contract”.[4]

A “consumer contract” is defined as a contract for:

“a supply of goods or services; or

a sale or grant of an interest in land”.[5]

Importantly, the amendments to the ACL expand the class of small businesses subject to the rules as to unfair contract terms because the ACL now provides that a contract is a “small business contract” if:

• “it is for the supply of goods, services or a sale or grant of interest in land; and
• at the time the contract was entered into, at least one party to the contract is a business that employed fewer than 20 persons; and
• either of the following applies:

• the upfront price payable under the contract does not exceed $300,000; or
• the contract is of a duration of more than 12 months and the upfront price payable does not exceed $1 million.”[6]

The majority of contracts brokered by agents in respect of the sale of land, or with respect to tenancy agreements, will fall within either the definition of a “consumer contract” or a “small business contract”.

What is unfair?

Two factors must be satisfied for the unfair contracts provisions in Part 2-3 of the ACL to be engaged, that is, the term must be both unfair and contained in a “standard form contract”.

The ACL defines “unfair” as:

• “it would cause a ‘significant imbalance in the parties’ rights and obligations’; and
• it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged; and
• it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied upon.”[7]

The assessment as to the “unfairness” of a contract must be undertaken by considering:

1. the extent to which the term is “transparent”; but
2. considered in the context of the contract as a whole.[8]

The ACL goes on to provide examples of “unfair terms”, at section 25, which include, amongst other things:

1. a term permitting one party, but not the other, to avoid performance of the contract;
2. a term permitting one party, but not the other, to terminate;
3. a term which permits one party, but not the other, to vary the contract;
4. a term which permits one party, but not the other, to renew or not renew the contract.[9]

The common theme of the examples is that one party is placed in a stronger bargaining position than the other.

What is a “standard form” contract?

As to whether the “unfair” term appears in a “standard form contract”, the ACL creates a reverse onus, that is, if the consumer alleges it is a “standard form contract”, it is presumed to be so, unless the other party proves otherwise.[10]

The determination of whether a contract is a “standard form contract” and, so, falls within section 23 of the ACL, turns upon the following considerations, namely:

1. whether one party or another has most of the bargaining power relating to the transaction;
2. whether the contract was prepared by one party before any discussion between the parties;
3. whether one party was required to either accept or reject the terms, as presented;
4. whether the other party was given an opportunity to negotiate the terms;
5. whether the contract takes into account the “specific characteristics” of the parties or the particular transaction.[11]

Consequences of unfairness

The consequences of the term being found to be an “unfair term” in a “standard form contract” is that the term will be void, but the contract may continue to bind the parties, if it is “capable of operating without the unfair term”.[12]

The associated risk with a clause being found to be “unfair” is that an agent may be found to have engaged in “unconscionable conduct” with respect to the provision of their services,[13] or to have made false or misleading representations about their services, or the sale of land.[14]

The consequences of those findings are serious; sections 151, 152 and 224 of the ACL prescribe the significant pecuniary penalties which may be imposed for “unconscionable conduct” (as defined in Part 2.2 of the ACL) as:

1. if the responsible entity is a company, the penalty shall not exceed $50 million; and
2. if the responsible person is an individual, shall not exceed $2.5 million; and

   with respect to the engagement in “misleading and deceptive conduct”:

3. if the responsible entity is a company, the penalty shall not exceed $50 million; and
4. if the responsible entity is an individual, $2.5 million.

In the alternative, with respect to misleading or deceptive conduct as to a contract term[15], a penalty may be imposed representing three times the value of any benefit obtained by a company or, if the court cannot determine the value of the benefit, 30% of the company's adjusted turnover.[16]

Discussion

Whilst an argument may be made that an agent, in drafting a special term or condition to a contract of sale or a tenancy agreement, that is, in tailoring the document to the parties and the particular transaction, takes the document outside the parameters of the “standard form” contract, whether, or not, the clause will be considered to be “unfair” will still be considered by reference to section 24 of the ACL.

That is, a dissatisfied consumer may argue that the special condition or clause which appears in a “standard form” contract or tenancy agreement favours the other party, or is not reasonably necessary to protect the interests of the other party, or would cause the complainant detriment, and, so, is void.

The fairness, or otherwise, of such a clause must be assessed by reference to its transparency, that is, whether it is obvious as to what is sought to be achieved, considered in the context of the contract as a whole.

This is not to say that a special condition which favours one party over another in a contract of sale or a tenancy agreement will never be upheld, but, to do so it must be:

1. expressed in plain language;
2. legible;
3. clearly presented; and
4. readily available to the party affected.[17]

There have not yet been any decided cases as to whether, or not, “standard form” REIQ contracts might be considered to contain any “unfair” terms. It is respectfully suggested that the “standard form REIQ contracts of sale or tenancy agreements” are not unfair; they have been carefully crafted, over a long time, by experienced industry players and lawyers, to balance the rights of both parties.

But what is untested is whether any “special terms”, which might be included in an REIQ contract, might be considered to be “unfair”.

And the answer to that question depends on each term being separately and carefully considered, by reference to the tests set out in the ACL.

Agents should exercise caution in the inclusion of special clauses in contracts which favour one party over the other, at the risk of those clauses being found to be “unfair”, void, and exposing the agent to significant penalties.

As a matter of best practice, the creation of clauses that favour one party over another should be a matter in respect of which the agent receives instructions from his or her client, on the basis of legal advice provided to his or her client and, if such a clause is proposed, agents should be astute to ensure that any such “special clauses” are comprehensible, conspicuous, readily available to both parties and that both parties are afforded the opportunity of seeking legal advice as to the import and effect of those “special clauses”.

Read more from Carter Newell Lawyers: Best practice for the use of electronic signatures.

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