The `one size fits all' approach to contracting is a common feature within the IT industry. Standard form contracts are an efficient and cost-effective method of doing business and are often used for online terms of use and projects which are of low risk, value and/or complexity.

From 12 November 2016, the unfair contract terms regime in the Australian Consumer Law, which until then only applied to individual consumers, was extended to contracts where at least one party is a "small business" and the upfront price payable is $300,000 (or $1 million if the contract is for a term longer than 12 months). A "small business" is a business that employs less than 20 people. It will also apply to contracts which are varied after 12 November 2016.

What is an "unfair" contract term?

Whether a term is "unfair" is decided by a court or tribunal. A term is "unfair" if the following three criteria are satisfied:

  • it causes a significant imbalance in the parties' rights and obligations under the contract;
  • it is not reasonably necessary to protect the legitimate interest of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if the term were relied upon.

A court or tribunal, in determining whether a term is unfair, must assess the transparency of the term. This includes an assessment of how the term is expressed, is it in plain language and is it presented clearly? The court or tribunal must also consider the term in light of the contract as a whole and not in isolation.

Unfair terms in standard form contracts

Examples of standard form contract terms that may be challenged in court or at a tribunal for "unfairness" include:

  • terms requiring the customer to indemnify the supplier for any damage caused, even if it is caused by the supplier's own negligence;
  • terms that allow a supplier to cancel a contract at will for an inconsequential breach of contract by the customer;
  • terms that restrict a customer from obtaining a refund or exercising a termination right where the supplier has failed to meet its obligations under the contract; and
  • terms that provide for automatic renewal without the customer's consent.

What does this mean for your business?

Where a supplier's business model is directed at providing services to small to medium enterprises (SMEs), and the supplier has not had to address this issue in the past for "consumer" customers, it is likely to be impacted by this extension of the unfair contract terms regime. Standard form contracts (e.g. online terms of use, confidentiality agreements, software licences, support agreements, supply and/or services contracts) for SME customers should be reviewed to determine whether any of the terms may be considered "unfair".

If a court determines that a term is "unfair", it can make a range of orders, including declaring part or all of the contract void and/or varying the contract. If a court orders a contract to be varied, this may result in the supplier being unable to enforce other rights it may otherwise have, either under the contract itself or at law.

Additionally, customers which are small businesses may challenge contract terms that they consider are unfair to prevent a supplier from enforcing express rights under the contract. Such challenges will cost a supplier both time and money to address, even if it is able to successfully defend the claim. In addition, in this day of instant and free customer feedback on social media sites, there is also the risk of reputational damage in the market.

Suppliers should ensure their standard terms are appropriate for the type, size and nature of both the target customer and the goods and services being provided, with an appropriate balance of risk and responsibility between the parties.