A contract is an agreement made between parties, that is legally enforceable. It stipulates parties’ rights and obligations. We all make contracts almost every day. When you fill the car up with petrol or purchase a parking ticket and so on. The contract Law in Australia is primarily governed by the “Common Law”. Three key elements of the Contract are Offer, Acceptance and Consideration.
The Offer
One party makes an offer to another Party. The party (Offeror) could offer an item or service. Eg, the owner of the property, pest control services and so on. The offer must be identified clearly, otherwise, the contract could be void.
The acceptance
When an offer is made, the offer must be accepted by the other party (Offeree). The Offeree can either accept the offer or make a counteroffer. Then the offeror has the choice to accept or reject the counter-offer.
Consideration
Both Offeror and Offeree must exchange consideration as an element of the offer and acceptance. The consideration could be in the form of cash for a product or service. The importance is that the parties are exchanging something of value as a requirement of the offer and acceptance.
The capacity of the parties
Apart from the above three required key elements, the parties’ capacity is another important element for the contract to be legally binding. For example, the parties must have the “capacity” to enter into a contract. A contract could not legally bind a minor or someone who suffers from severe mental health issues.
Lawful purpose
The contract must be for a lawful purpose to be valid when parties enter a contract.
Standard form contract
Since 2010, the Australian Consumer Law (ACL) has provided consumers with protection against unfair contract terms imposed on them via standard-form contracts. Standard from contract employs standardised, non-negotiated terms between parties. It is commonly used in business, and it is an efficient and cost-effective option.
Unfair Contract
When a term/or terms of a standard form contract is “unfair” if it is one-sided and excessive, eg, it creates a significant imbalance between the parties, and it is not reasonably necessary to protect the party’s legitimate interests while would cause detriment to another party. The terms of the contract are void, meaning the unfair terms of the contract is not binding on the parties. However, the rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair terms.
In determining whether terms are “unfair”, a court will read the terms in the contract of the entire contract and will take into consideration if the contract is easy to read and clearly presented.
In one of the case laws, Jestar Airways Pty Ltd v Free [2008] VSC 539, The court has emphasised that terms may not be unfair if they are clearly drawn to the other party’s attention prior to the agreement. To reduce the risks of terms being considered unfair, it is always important to put the cards on the table.
Case Law
Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 (JJ Richards & Sons)
JJ Richards is one of the largest privately-owned waste management companies in Australia, providing recycling, sanitary and green waste collection services.
The ACCC alleged that JJ Richard’s standard form small business contracts contained eight unfair contract terms, as followings:
- binding customers to commit to subsequent contracts unless they cancel the initial contract within 30 days before the end of the term;
- allowing JJ Richards to unilaterally increase its prices (price variation clause);
- removing any liability for JJ Richards where its performance is ‘prevented or hindered’ even where the customer is not responsible (performance clause);
- allowing JJ Richards to charge customers for services not rendered for reasons that are beyond the customer’s control (or potentially for reasons within JJ Richards’s control – for example, equipment failure);
- granting JJ Richards exclusive rights to remove waste from a customer’s premises (exclusivity clause);
- allowing JJ Richards to suspend its service but continue to charge the customer if payment is not made after seven days;
- creating an unlimited indemnity in favour of JJ Richards (indemnity clause); and
- preventing customers from terminating their contracts if they have payments outstanding and permitting JJ Richards to continue charging customers for equipment rental after the termination.
In the above case, the Federal Court emphasised that the “significant imbalance” requirement is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in its favour. the Court was also satisfied that the terms were not reasonably necessary to protect JJ Richard’s legitimate interest, a term of the contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party unless that party proves otherwise.
As a result, has declared, by consent, eight terms in the standard contract used by JJ Richards & Sons to engage small businesses are unfair and therefore void.
Warning – Review standard form contract
Examples of unfair terms:
- allow one party to unilaterally vary the contract;
- enable one party to avoid or limit their obligations;
- create an automatic rollover extension of the contract;
- impose excessive interest rates;
- limit party’s ability of redress or remedies for the breach by the other party;
- limit the party to vary, terminate or renew the contract.
Contact CFS Legal dedicated lawyers, we tailor your contract to your specific needs for your business transactions. Email: info@cfslegal.com.au