Abledale Law

4 things to know about unfair terms in supply contracts

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Our last blogs looked at commercial and operational terms of supply contracts.  This time we will focus on unfair terms and what to keep an eye out for as a business, whether using your standard form supply contract (for goods or services) or reviewing one presented by the other party.

Amendments to the Australian Consumer Law (ACL) came into effect late last year and expanded what constitutes an unfair contract term and the range of businesses that are impacted by these laws.  These changes relate to supply contracts made, renewed or varied on or after 9 November 2023.

1. Does the unfair contracts regime apply to your business?

If there’s any doubt, it is safest to assume the unfair contract regime applies.

The first question: is the relevant supply contract either:

  • a consumer contract? It will be if there is a sale of goods or services to an individual for predominantly personal or household use
  • a small business contract?  It will be if a party to the agreement has fewer than 100 employees or an annual turnover of less than $10 million 

If it is, the second question is whether it is a standard form contract?  Standard form contracts are, in short:

  • standard supply agreements, that is, usual terms of business for that party with little customisation for the relevant arrangement
  • offered on a take it or leave it basis, or with limited meaningful opportunity to negotiate
  • offered by a party with significantly more bargaining power 

If the relevant supply contract is also a standard form contract, the unfair contract regime applies.

2. What is an unfair contract term?

The court would ultimately decide whether a term is unfair considering the context of the contract as a whole and how easy it is to find and read the relevant term and:

  • whether the term significantly favours the party who proposed it and whether it is reasonably necessary to protect the interests of that party, and
  • any detrimental outcomes for the other party if enforced

Trip hazards include:

  • automatic renewals
  • the right to vary the contract (including price increases) without the consent or consideration of the needs of the other party
  • one-side terminations rights
  • late payment or other fees that are higher than any actual loss of the supplier
  • those indemnities and liabilities we looked at in our last blogs  

3. What should you do?

If you are using your usual terms and conditions of supply which may be caught be the unfair contracts regime:

  • allow the other party a decent opportunity to negotiate the terms
  • point the other party to the key terms in the contract at the outset
  • review your usual terms and conditions, and in particular consider:
    • whether your terms are clear and simple
    • fair and balanced
    • for any of those trip hazards listed above or other terms which may be unfavourable to the other party, are these terms reasonably necessary to protect your business interests?  Carefully think through your reasons for including these types of clauses.

If you are reviewing another party’s standard form contract, use the pointers in this blog to know your rights.

4. Be aware significant penalties apply

It is unlawful to propose, use or rely on any unfair contract term, and significant penalties apply.  The unfair term will also be void, which means that it will no longer apply to the contract, which will continue without it.

The ACCC takes a dim view of unfair contract terms and the penalties reflect this.  A company found to have breached the new laws can face fines the greater of:

  • $50 million;
  • three times the value of the benefit the business got out of its conduct; or
  • if the benefit can’t be established, then 30% of the adjusted turnover of the business during the period of the breach (minimum 12 months).

As you can see, it’s important to get the balance right when the parties to a supply agreement aren’t on equal footing. 

As the name suggests, this isn’t advice, it’s just a story.  If you’re reviewing the terms and conditions of a supplier, or are looking to develop or improve your own, please get in touch to discuss how we may be able to assist you.  

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