Australia: Unfair contracts – the law continues to develop

Australia is often spoken of as the "land of the fair go", but how true is this of contracts which, in many ways, govern the lives of average working people? This article examines some aspects of the protections available to people trapped in unfair contracts.

What is a contract?

The concept of the contract is a defining feature of our legal system. Dating back many hundreds of years, it is a device by which two citizens who enter into an agreement to do something to their mutual benefit can have that agreement enforced by a court.

The two elements which must be present for a court to recognise a contract are genuine agreement between the contracting parties; and "consideration", which means that some value (usually commercial in nature, but not necessarily so) must accrue to each party when the contract is fulfilled.

The underlying assumption is that any such agreement is entered into voluntarily. Thus the courts would act to enforce a contractual obligation, or award compensation for its breach. This was true even if the "bargain" enshrined in the contract seemed a bit one-sided; and originally the only exceptions were when some misrepresentation or undue influence had been involved.

No equality of bargaining power

However, since the development of a largely industrial and commercial society, it is the case that the underlying assumption of the equality of bargaining power between contracting parties is essentially a myth. A citizen entering a contract, for example, to buy a used car or to borrow money for a house purchase has, in practice, little or no ability to negotiate terms.

The buyer can of course approach another provider but, as anyone who has taken out a loan will know, all providers require remarkably similar terms. If the buyer wants the product, it must be on the terms offered, or not at all. There is no equality of bargaining power.

Although the law frequently lags behind societal development, it does however eventually catch up. Two examples have been around for some time.

Regulatory frameworks to safeguard interests of employees

For example, for a century or more the law has recognised that contracts of employment govern situations where the bargaining power of employers and employees is unequal, and has constructed regulatory frameworks to safeguard the interests of employees.

The latest in a long line of legislative provisions, stemming from the introduction of a workplace "umpire" shortly after Federation, is the Fair Work Act 2009.

Consumer protection broadened considerably in recent decades

More recently, the law has recognised that consumers generally lack bargaining power. Legislative protections in relation to the sale of goods first appeared in the first half of the 20th century, and have since broadened extensively. We now have the Australian Consumer Law (ACL), which can be found in Schedule 2 to the Competition and Consumer Act 2010.

Even more recently, however, there has been recognition that small businesses also need this sort of protection.

Unfairness and small business

It may have been the "baby boomers" who first had sufficient money to buy their own small businesses. A more rewarding investment, it might have been thought, than property or interest-bearing deposits; and safer than playing the share market.

However, these "mum and dad investors" frequently lacked any real capacity to assess the viability and likely profitability of businesses offered to them as magic puddings. Failures often brought bankruptcy, especially in the case of franchises such as service stations and fast food outlets.

Contracts Review Act 1980

In New South Wales the first protection was, oddly enough it might be thought, under employment legislation. However, we now have the NSW Contracts Review Act, which gives courts the power to deal with "unjust" contracts and gives the courts a wide range of powers to intervene by way of correction.

"Unjust" is defined to "include" (a word signifying that other possible examples are not excluded) a contract being "unconscionable, harsh or oppressive".

Retail Leases Act 1994

While the operation of the NSW Retail Leases Act is not limited to shopping malls, the mall is the typical setting.

While commercial leases are very detailed and prescriptive, and typically give the lessor (landlord) a very large degree of control over the premises – for example, requiring the lessee (tenant) to relocate from one shop to another – it was usually difficult for prospective business lessees to get a complete picture of the commercial performance of the mall to enable them to make informed decisions about entering a lease.

Worse, they might invest a lot, only to have the lease cut short.

The Retail Leases Act requires the lessor to provide a lot of additional information and, importantly, mandates a five year minimum lease term, irrespective of what the lease itself might say.

Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015

Despite the date in the title, the Federal legislation known as the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (which for convenience we will call the Unfair Contracts Act) took effect on 12 November 2016. It is specifically aimed at unfair contract terms. One clearly spelled out category of unfair terms is terms which one party, but not the other, can vary unilaterally.

Although the Unfair Contracts Act does not apply retrospectively, it applies to amendments to contracts made after the commencing date. As it is very new, how it will be applied in practice is still unknown.

What is unfairness?

No-one really has a definition of unfairness. Moreover, most legislation doesn't try to define it. Instead, the legislature turns to similar words ("harsh", "unconscionable") and, more helpfully, to "indicators". Thus a contract exhibiting certain characteristics may be unfair, but no individual matter will, by itself, guarantee that a court would hold it to be unfair.

Indicators of unfairness

The degree of bargaining power is one of these indicators. The ability of one party to a contract to vary some term of it unilaterally is another.

While contracts based on a misrepresentation will be held invalid, it may be "unconscionable" for one party, even in the absence of a question by the other, to fail to inform the other of some factor which, "reasonably" viewed (yet another of those words) might have deterred that party from entering the contract, at least on those terms.

Penalties recognised as unenforceable under common law

A monetary charge levied for a breach by one party of a contract term may be so disproportionate to the actual damage or loss suffered by the other that it may amount to a "penalty" (which the common law also recognises as being unenforceable). However, the issues may be more complex than they appear at first.

Quite recently, a class action taken by bank customers failed when it sought to challenge fees imposed for late payment of credit cards and loans as being penalties. The bank convinced the court that it suffered more than merely minor inconvenience when payments were late.

Legislative protections no substitute for due diligence

So, although legislation is progressively providing additional protections, these are not a licence to be careless. Making "due diligence" inquiries is essential, and there is a huge volume of material on the internet which can help in checking on the advisability of entry into a contract. But, if you have done your best and yet find yourself caught, you may have a lifeline.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.