In what circumstances are standard terms binding?
Changes to the Australian Consumer Law (ACL) have impacted the drafting and litigation of contracts. In this context, how binding are standard terms?
Standard terms are binding:
- If at common law the terms are incorporated into a contract or agreed to, and
- If so, whether this is changed by a statutory protection
Are the standard terms incorporated into the contract at common law?
The type of agreement determines if the standard terms are included into a contract at common law. Broadly this means:
- if the terms are agreed by signature generally they are binding
- the same applies if the terms are agreed by clicking a button to show acceptance
- alternatively if the terms are said to be agreed (by conduct) then:
- the terms are incorporated into the contract and binding if given to the customer before making the contract and if the terms are of a usual type expected by the client
- if the terms are unusual then they will only be included and binding if they are clearly brought to the attention of the client
- terms not given ahead of time to the customer are not generally binding
ACL unfair standard terms protection
However, as of 12 November 2016 the Australian Consumer Law (ACL) protects small businesses from unfair terms. The protection applies to standard form contracts. Previously the ACL only covered individuals and consumers.
What is a standard form contract? The ACL does not provide a definition. However, in broad terms it is a contract between two parties. The one sets the terms and conditions while the other party is in a “take it or leave it” position. They also have little or no ability to negotiate better terms.
These one-sided contracts are common. Small businesses enter into them on a daily basis for financial products and services. Examples are car rental agreements, credit card or business loan contracts and telecommunication contracts. In addition, many contain contract terms that some may consider unfair.
Even if a set of standard terms are binding at common law, if a term is ‘unfair’, it may be declared void under the ACL.
What is an ‘unfair’ term in a standard form contract?
A term is ‘unfair’ if it:
- causes a major difference in the rights and duties of the parties involved
- is not reasonably needed to protect the interests of the stronger party
- would cause harm, financial or other, to the small business if applied
However, only a court can decide if a term is ‘unfair’. The court needs to study the contract as a whole. In the context of the contract is there another term that balances the unfair term? Also the transparency of the term is considered.
A transparent term is:
- written in understandable language
- clearly presented
- readily available to all parties impacted by the term
Terms that are not transparent are those hidden in the fine print of the contract. Also terms written in complex, legal language that is not easily understood fall into this category.
What about excluded contract terms?
A contract term is excluded from unfair protection if it:
- outlines the main subject of the contract (eg the length of the contract or the types of goods/services included)
- decides the upfront price payable
- is permitted by the law of a state, territory or the Commonwealth
What if a court finds a term ‘unfair’?
In conclusion, a term of a standard form contract may be declared void if a court finds it unfair. It is as if the unfair term never existed. However, if the contract is able to function without the unfair term then it is still binding on all parties involved.
This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances.