Guide to Unfair Contract Terms: Protections for NFPs

Introduction

Not-for-profit organisations frequently encounter standard form contracts that offer little to no room for negotiation. To address this imbalance, Australian contract law provides significant unfair contract term protections for not-for-profits that qualify as small businesses.

This article explains how the unfair contract term protections operate for not-for-profit organisations. It covers how to determine if a contract term is unfair, the consequences of using an unfair term, and the practical steps your organisation can take when faced with potentially unfair contracts.

Interactive Tool: See If Your Not-for-Profit Is Protected From Unfair Terms

Standard Form Contracts & Unfair Contract Terms for NFP Organisation

Defining Standard Form Contracts in Australian Contract Law

A standard form contract is generally understood as an agreement prepared by one party without any genuine negotiation between the parties about its terms. In Australian contract law, these are often presented on a ‘take it or leave it’ basis. Furthermore, a contract is presumed to be a standard form contract unless the other party can prove it is not.

When determining if a contract is a standard form contract, a court will consider several factors, including:

• Bargaining power: whether one party holds all or most of the bargaining power in the transaction.
• Preparation: if the contract was prepared by one party before any discussion about the transaction occurred.
• Acceptance or rejection: whether the other party was effectively required to either accept or reject the contract in the form it was presented.
• Negotiation opportunity: if the other party was given any real opportunity to negotiate the terms of the contract, noting that a contract may still be considered standard form even if minor or insubstantial changes were negotiated.
• Specificity: whether the terms of the contract fail to take into account the specific characteristics of the other party or the particular transaction.

Determining if Your Organisation Qualifies as a Small Business

The unfair contract term protections under Australian Consumer Law (‘ACL’) apply to standard form contracts involving a small business. Reforms that came into effect on 9 November 2023 expanded the definition of a small business, offering these protections to more organisations.

For a standard form contract entered into, renewed, or varied after 9 November 2023, your not-for-profit organisation is considered a small business if it meets one of the following criteria:

• Employs fewer than 100 people: this applies at the time the contract is made, and includes part-time employees as a fraction of a full-time equivalent but excludes casual employees unless they are employed on a regular or systematic basis; or
• Annual turnover of less than $10 million: this applies to the previous income year.

In addition, these changes to the unfair contract terms regime also removed the upfront price payable threshold. As a result, this has broadened the scope of contracts covered under the protections.

Identifying When a Contract Term is Unfair to Charity Organisation

Assessing Significant Imbalance & Detriment

A term in a standard form contract is considered unfair if it meets three specific criteria. A court will assess these elements to determine if a contract term should be voided under the unfair contract terms regime.

The three key tests for an unfair term are as follows:

• Significant imbalance: The term must cause a significant imbalance in the rights and obligations of the parties involved in the contract, which often means the term is one-sided and favours the party who prepared the agreement.
• Lack of necessity: The term is not reasonably necessary to protect the legitimate interests of the party who benefits from it, and the business proposing the term must prove its necessity if challenged.
• Causes detriment: The term would cause harm, whether financial or otherwise, to your not-for-profit organisation if the other party were to apply or rely on it.

Evaluating Transparency & the Contract as a Whole

When deciding if a term is unfair, a court looks beyond the three main tests and considers two other important factors. These are the transparency of the term and the context of the entire agreement.

A court will evaluate the transparency of a contract term by assessing whether it is:

• expressed in reasonably plain language;
• legible and presented clearly; and
• readily available to any party affected by it.

A term hidden in fine print or written in complex legal language may not be considered transparent. In addition, the court assesses the term within the context of the contract as a whole. Therefore, a term that might seem unfair in isolation could ultimately be balanced by other terms in the agreement.

Common Examples of Unfair Contract Terms

Certain types of clauses in standard form contracts are more likely to be identified as an unfair contract term. These terms often grant one party rights or powers that the other party does not have, thereby creating an imbalance.

Examples of terms that may be considered unfair include those that permit one party, but not the other, to:

• Vary the contract: This allows one side to change any part of the agreement, such as the price, without giving your organisation the right to terminate the contract.
• Terminate the contract: A clause that gives one party an unrestricted right to end the contract at any time without notice can be unfair, as a supplier terminating services immediately could disrupt a charity’s operations.
• Renew or not renew the contract: Automatic renewal clauses, especially those with difficult cancellation processes or high fees, can lock an organisation into an unwanted agreement.
• Limit liability: These terms attempt to excuse one party from legal responsibility for something happening, even if they are at fault.
• Penalise for a breach: A term that imposes a penalty on one party for breaching or ending the contract, but not on the other, is often viewed as unfair.
• Assign the contract: This allows a party to transfer their rights and obligations to someone else without the consent of your organisation, potentially to its detriment.

The Consequences of Unfair Contracts for Australian NFP Organisations

Voiding the Unfair Contract Term

If a court determines a contract term is unfair, that specific term is declared void. This means the unfair term is treated as if it never existed and cannot be enforced or relied upon by any party. However, the remainder of the contract will continue to be legally binding on all parties. Ultimately, the contract will remain in effect as long as it can operate without the voided term.

Financial Penalties for Breaching the Unfair Contract Terms Regime

For standard form contracts made, renewed, or varied after 9 November 2023, significant financial penalties can be imposed. A business may face penalties for proposing, using, or relying on an unfair contract term. Furthermore, each unfair contract term can be treated as a separate breach of ACL.

A court can order a party that breaches the unfair contract terms regime to pay a penalty, which will be the greater of the following amounts:

• a flat penalty of $50 million;
• three times the value of the benefit gained from the contract; or
• 30% of the business’s adjusted turnover during the breach period if the benefit cannot be determined.

Case Study: Analysing Unfair Contract Terms in the Federal Court

The ACCC Allegations Against Fujifilm

To illustrate the practical application of the unfair contract terms regime, it is useful to examine proceedings brought by the Australian Competition and Consumer Commission (ACCC). In Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928, the ACCC alleged that 38 terms in some of Fujifilm’s standard-form small business contracts were unfair.

The challenged contract terms covered a wide range of issues, including:

• Automatic renewals: Clauses that automatically extended the contract period without adequate notice or an easy exit process.
• Unilateral variations: Terms that allowed Fujifilm to change aspects of the contract without the other party’s agreement.
• Unfair payment terms: Conditions related to payment that disproportionately favoured Fujifilm.
• Incorporation of other documents: Clauses that bound small businesses to terms in supplementary documents they may not have seen.
• Suspension and termination rights: Terms that gave Fujifilm broad rights to suspend services or impose disproportionate payments upon termination.
• Liability and indemnities: Clauses that unfairly limited Fujifilm’s liability, imposed broad indemnities on the customer, and included unfair warranties.

The Federal Court Orders & Penalties

The Federal Court found in favour of the ACCC and made several orders against Fujifilm. The court declared the unfair contract terms to be void, meaning they were unenforceable and treated as if they never existed.

As a result of the case, Fujifilm was ordered to:

• Stop enforcing the unfair contract terms in its existing contracts.
• Refrain from relying on these or similar terms in future contracts.
• Publish notices on its website to inform customers that the terms were declared void.
• Implement a compliance program to train employees involved in drafting and negotiating contracts.
• Pay $250,000 to cover the ACCC’s costs for the legal proceedings.

Steps NFP Organisation Can Take When a Term is Unfair

Negotiating with the Contract Provider

If your not-for-profit organisation believes a contract term is unfair, the first step is to communicate directly with the other party. You can ask them to remove the unfair term or amend it to be more balanced. Furthermore, it is important to read and understand all terms before signing any contract.

If the contract has not yet been signed and the provider is unwilling to change the unfair contract term, your organisation should be prepared to walk away from the agreement. Challenging a term may cause delays, so it is a practical consideration for your organisation to weigh against the potential harm of the unfair term.

Seeking Alternative Dispute Resolution & Legal Advice

When direct negotiation does not resolve the issue, several other pathways are available. As a result, your organisation can take further action to address the unfair contract term, with options including:

• Lodge a formal complaint: For contracts involving financial products or services, you can complain to the provider’s internal dispute resolution process. If you are not satisfied with the outcome, you can escalate the complaint to the Australian Financial Complaints Authority (AFCA).
• Contact an ombudsman: Many industries have alternative dispute resolution schemes or an industry ombudsman that can help, though some matters may require formal NFP and charity dispute investigations to resolve disputes over an unfair term.
• Report the issue: You can report the unfair contract term to a regulatory body. For most contracts, this is the Australian Competition and Consumer Commission (ACCC) or your local state and territory fair trading agency, whereas for financial products and services, reports should be made to the Australian Securities and Investments Commission (ASIC).
• Seek legal advice: A lawyer can provide information about your organisation’s rights and options. This may involve taking the matter to a small claims tribunal or applying to a court to have the unfair term declared void.

Conclusion

Australian contract law provides essential protections for not-for-profit organisations against unfair terms in standard form contracts, particularly after the 2023 reforms expanded the unfair contract terms regime. Understanding how to identify an unfair term, the consequences of using one, and the steps to take is fundamental for any not-for-profit to protect its interests.

Contact our experienced not-for-profit lawyers at LawBridge if your organisation is dealing with potentially unfair contracts or requires expert assistance with charity and not-for-profit law. Our team specialises in this complex field and can provide the guidance needed to ensure your agreements are fair and your organisation is fully protected.

Frequently Asked Questions