Unfair contract term laws: important changes and IP agreements

17 December 2020

Upcoming changes to the unfair contract term laws mean any business that requires customers or small business commercial partners to enter into standard form contracts should remove ‘unfair terms’ from those contracts, or face penalties. Here, we summarise these changes and discuss how they apply to intellectual property agreements.

What contracts do the laws apply to?

The laws currently – and will continue to – apply to ‘standard form’ contracts for the supply of goods or services where one party is a small business. These are ‘take it or leave it’ contracts. Standard form contracts are the same or similar contracts for all customers, and there’s little or no opportunity to negotiate their terms. A contract is presumed to be in standard form unless the other party can prove otherwise. If a party has an effective opportunity to negotiate its terms, it will not be a standard form contract.

What are the changes?

The Federal Government has agreed with the States and Territories to implement a range of changes to the unfair contract term laws. No draft legislation has been proposed – however, the agreed changes are summarised as follows.

New laws

Current laws

A small business is now one that has fewer than 100 employees or an annual turnover of less than $10million. 

The unfair contract term laws currently apply where a small business has fewer than 20 employees, and where the price payable under the contract is either: less than $300,000 up front; or less than $1million up front if the contract has a duration of more than 12 months.

Civil penalties (i.e. monetary fines) will apply.

Civil penalties do not currently apply. Remedies are limited to a Court: (a) declaring the unfair contract term unenforceable; and (b) making orders against a party to a contract who is advantaged by the term, to compensate damage or loss suffered by the relevant class of persons.

It will be unlawful for a contract to contain unfair contract terms.

Unfair contract terms are void (i.e. enforceable).

The definition of standard form contract will be clarified by reference to factors such as repeat usage of a contract template, and whether the small business had an effective opportunity to negotiate the contract.

A Court will take into account those matters it deems relevant and other prescribed factors in determining whether a contract is ‘standard form’.

When is a term ‘unfair’?

A term is unfair if:

(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

A Court will consider whether the term is transparent, and give regard to the contract as a whole.

What are some examples of unfair terms?

Some examples of terms that may be unfair include:

(a) terms that permit one party (but not another) to avoid or limit performance of a contract;

(b) unilateral termination rights;

(c) penalties for breach of contract;

(d) unilateral variation rights;

(e) a term that permits only one party to renew the contract;

(f) unilateral price variations, or product/service variations;

(g) unilateral contract interpretation clauses; and

(h) unilateral vicarious liability limitations.

These terms will not be unfair in all circumstances. But if such terms are incorporated into a standard form contract, significant care should be taken to assess whether they would – or may be – considered unfair according to the criteria above.

How do the laws apply to intellectual property agreements?

IP agreements that are negotiated, where parties can request and obtain amendments, are unlikely to be standard form contracts and the unfair contract term laws will not apply.

IP agreements where only a few key commercial terms are negotiated (e.g. the price payable, term of IP licence, or scope of service) and no others, will be subject to the laws. Particular care should be taken not to breach the laws if you have developed standard templates for arrangements such as research service contracts, product development contracts, software development contracts or SaaS contracts. You should be cautious of the example terms above, but also:

(a) IP ownership clauses (e.g. will the person paying for the IP ultimately own the IP, or take a mere license of it);

(b) IP licensing clauses (e.g. is it reasonable for a party to take a non-exclusive licence of the customer’s IP);

(c) clauses that deal with the quality of services/developed IP (e.g. if there are errors in the software developed, or the quality of research output is poor or contains errors, is the Customer’s remedial action limited); and

(d) default clauses that vest particular IP in one party, or result in the loss of a critical IP license for contract breaches that a defaulting party does not have an opportunity to remedy.

You should make clear in your templates those clauses that are negotiable, in order to mitigate the risk the contract is a standard form contract. If this is not possible and there is a risk the contract will constitute a standard form contract, you should review your terms carefully to ensure your terms are not unfair. If a term may be unfair but necessary, have back-up clauses in the event the term is found to be unfair and unenforceable (though note that civil penalties may imposed under the new laws). Cascading clauses can permit varying degrees of the term to operate, and be read down if necessary. However, it is unclear whether a Court would read the clause down and civil penalties can still be imposed under the new laws.

Of course the devil’s always in the detail, which will be in the legislation once passed – so watch this space for more.