Wednesday, 6 April 2016

Unfair Contracts

Gesselenbrief Document: public domain photo by Stadarchiv Bludenz, courtesy of Wikimedia Commons
It sometimes happens that two persons make a contract which one of them realises or later decides is unfair. Can the unhappy person break off the contract, or reverse it?

This has always been a difficult issue for the legal system, because the core concept of contract law is that it is a freely made, binding agreement.  If the law allows persons to change their minds, then what contract will be safe from challenge?

But the law does recognise exceptions to the rule that your signature on a contract is the end of the story, and the contract cannot be changed or abandoned after it has been signed.  For example, a signature obtained by fraud does not create a binding contract.

In recent years there have been changes to laws in many countries where the basis for overturning contracts has been expanded.  This change reflects an understanding that, in many situations, an ordinary person is at a significant disadvantage when dealing with large organisations like banks and insurance companies, which rely on complex, standard form contracts without much scope for negotiation.

In Australia, for example, an unfair contracts law was introduced in 2010 as part of a major restructuring of competition and consumer laws: see sections 23-28 of the Australian Consumer Law (ACL).  Under this regime, a court can declare an unfair term in a contract to be void if the following criteria apply:

  • the contract is a consumer contract
  • it is also a standard form contract
  • it has an unfair term
A "consumer contract" was originally defined in a way that excluded commercial agreements. On 1 July 2016, however, the coverage of the law was expanded to include small businesses. See the ASIC announcement regarding this amendment.

A "standard form" contract, as the name suggests, is a document that is prepared in advance in a form not subject to variation, but the ACL doesn't include a definition.  The language used by government bodies is that the document is offered on a "take it or leave it" basis.  In practice, this concept may lead to confusion.  Many standard form documents also have a box where the parties can include extra terms or comments.  Does this stop it from being a standard form contract?  The answer is unclear and the issue must be left to the courts to interpret the law, unless the law is amended. 

(Note: the author conducted a web search at the time of writing this post but wasn't able to locate a case report explaining what a "standard form" contract is, for the purposes of this particular law.)

An "unfair term" is defined by the Australian Consumer Law by the application of three tests:
  • a balance test: does the term create a significant imbalance between the rights and obligations of the business and the consumer?
  • a necessity test: is the term reasonably necessary to protect the interests of the business?
  • a detriment test: would the term cause a detriment to the consumer if it were enforced by the business?
The website of the Australian Competition and Consumer Commission provides more detail about how the unfair contract terms law works.

This blog post is not intended as legal advice for any particular person, but rather as an educational discussion of general issues. The post reflects the law current in Australia at the time of writing.  The author is James Irving, of Irving Law, a Perth lawyer whose practice includes preparing contracts and Wills.

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