Unfair Contract Terms - what are they & do your contracts need to change?

Rise Up In Business

Unfair contract terms is a phrase you may have heard, but understanding this concept as a small business owner is more pressing now than ever before.
In the past, small businesses were exempt from certain regulations regarding contract fairness. However, as of November last year, this is no longer the case. New legislation has made it critical for small businesses to ensure their contracts do not include unfair terms and the risks for non-compliance are very real, including penalties from $50,000 to $2.5 million, or even more.
The Changing Landscape of Contract Regulations
Starting in November last year, small businesses lost their exemptions from certain contract-related regulations. New legislation called the Treasury Laws Amendment (More Competition, Better Prices) Act 2022, falling under the broader Competition and Consumer Act, has come into play. This has placed a spotlight on unfair contract terms, mainly due to increased penalties and heightened consumer awareness.
What Makes a Contract Term Unfair?
In simple terms, an unfair contract term is one that significantly disadvantages the consumer while disproportionately benefiting the business without reasonable necessity. A common example is termination clauses in service contracts.
Impacts on Different Types of Services
This type of law isn’t black and white, which is why compliance needs to be assessed on a case by case basis. In the example of a contract termination, we need to look at the business, the terms that were agreed, the nature of the services being provided and what the business can reasonably do to mitigate their loss. The context differs across various service offerings.
One-on-one Coaching Agreements
Coaches with one-on-one services often have clauses such as “You cannot terminate early, and if you do, you must pay the full fee.” Such terms are often challenged because they unfairly demand payment for services not yet provided.
Masterminds and Group Coaching
For structured group programs where all participants start and finish together, it is more reasonable to have strict termination clauses. This is because the integrity of the group relies on full participation, and filling a spot halfway through the program is impractical.
Interior Designers
For project-based services like interior design, a middle ground is needed. Design agreements should allow for termination, but with reasonable notice and payment for work already completed. Terms like this are more likely to be viewed as fair.
What Happens If Your Contracts Are Challenged?
If a court or tribunal finds that your contract includes unfair terms, it used to be that only the unfair clause would be voided. Now, an entire contract can be invalidated, leaving your business with zero protection. Penalties for such infringements range from $50,000 to $2.5 million, making it absolutely vital, now more than ever, that all your contract terms are fair and compliant.
As a small business owner, making sure your contracts are fair and legally compliant is crucial, not only for avoiding legal issues but also for creating a sustainable business. If you’re unsure whether your contract terms are fair, now is the time to act. Feel free to reach out to me for a chat, I’d love to hear from you.

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