Black, grey, white – how ‘fair’ are your contracts
Macpherson Kelley recently published an article about the consequences of businesses using unfair terms in their standard form contracts with small businesses. In that article, we referred to a recent decision by the Federal Court where JJ Richards & Sons Pty Limited, a major Australian privately-owned waste management business, agreed that its standard-form small business contracts contained some unfair terms.
This article follows on from that with the view of further explaining how a clause can be considered fair or not from a legal perspective. It is critically important for your business to be able to identify and understand the clauses contained within your standard-form contracts, so as to avoid them being unenforceable.
The UK has implemented a useful approach to determining the ‘fairness’ of clauses. This approach categorises clauses as follows:
Black-listed terms are generally extremely unfair. For example, the following terms would likely be considered unfair:
- Non-Refundable Prepayments – particularly when the contract is terminated “for convenience” rather than for a breach by the paying party.
- Cancellation Clauses – where one party can decide to cancel a contract with disproportionate termination charges, even without notice, or where the other party can’t cancel under any circumstances.
- Hidden Terms – particularly when one party doesn’t give the other party full and clear information before they enter into the contract or use misleading wording.
- Variation Clauses – particularly those giving one party the right to make changes without the other party’s consent.
At the other end of the spectrum are ‘white-listed clauses’. These are terms that are generally immune from challenge. These are often the main subject matter and price terms expressed in plain and easy-to-understand language that will typically have received informed consent. These terms are easily identifiable.
In between the black and white listed terms, however, are grey listed terms. These terms are subject to the tests of reasonableness and fairness. When assessing the grey terms, the Court will generally consider, on the balance of probabilities, whether the term:
- causes significant imbalance in the parties rights and obligations under the contract; and
- is not reasonably necessary to protect the legitimate interest of the party who would be advantaged by the terms; and
- causes detriment to a party if it were applied.
Australian courts also need to consider the transparency of the term as well as the entire context as a whole. Some clauses that may seem unfair in isolation might actually not be unfair in the entire context.
Ultimately, however, if a court finds a term unfair, that term will be void. If a term in your standard-form business contracts is unenforceable, this could cause significant problems for your business down the track, especially if your commercial position and risk profile has been determined in reliance on the enforceability of those clauses.
If you are unsure about the “shade” of your terms, please contact us.