Unfair contracts: what are the main offenders and how to fix them.
“Unfair contract terms” was the hot topic of 2016. Businesses were warned to get their contracts reviewed, multiple articles were published explaining what an unfair contract term actually is, and the ACCC worked with some industries to weed out unfair contract terms.
The problem is, one party’s unfair contract term is another party’s necessary protection, especially in industries where contracts reign supreme.
Looking at authorised rep. and credit rep. agreements, we found a few terms that are likely to be considered unfair, because they’re either heavy handed, unilateral or go further than is needed to protect the licensee’s legitimate business interests.
Here are the main offenders – and some ideas on how to fix them:
- Indemnity clauses that favour one party over the other, and/or do not incorporate principles of causation and proportionate liability.
- Include proportionate liability principles in favour of the party providing the indemnity.
- Assignment clauses that allow a party to assign their rights without the other party’s consent.
- Make this fairer by including a notification requirement to the other party before assigning the rights and interests under the contract.
- Termination clauses that allow the contract to be terminated for breach, where the breach is rectifiable.
- Allow an opportunity to rectify breaches before a party can terminate for breach.
- Termination clauses that require a party to destroy records which would interfere with the tax and compliance requirements to maintain complete records.
- Allow restricted access to and/or retention of records for appropriate purposes.
- Termination clauses that that restrict a party’s right to remuneration after termination of a contract, even where they’re entitled to it.
- This one is a no-brainer: delete it.
- Confidential Information clauses that vest ownership of confidential information in one party and restrict the other party from using it, especially where the other party collected the information.
- Make this fairer by restricting the collecting party from sharing the information with competing businesses, but do not restrict general usage of the information for their necessary business operations.
- Unilateral variation clauses which only allow one party to vary an agreement.
- Reduce the unilateral nature of these clauses by providing the other party with rights that balance the first party’s ability to vary the agreement, e.g. require general variations to be agreed in writing and only permit unilateral variations that are necessary to comply with the law.
- Misleading clauses about legal rights, e.g. entire agreement clauses that state that the parties cannot rely on any previous agreements, documents, discussions, etc. This is not necessarily the law.
- Limit these clauses to previous written agreements, and allow the parties to rely on oral representations.
- Avoid including illegal provisions in your contract; courts generally frown on that sort of thing.
- Set off clauses that allow a party to deduct their indemnity claim from fees payable under the contract. Even where the claim is covered by insurance, insurers may view the deduction as a financial loss and refuse to pay it.
- Make this clause fairer by providing that claims that are covered by insurance cannot be deducted from fees payable.
- Unrestricted access clauses which require one party to allow the other party access to their records, premises, etc. on short notice periods without restrictions on the time and location for inspections.
- Limit the clause to reasonable access and specify reasonable notice periods.
Incorporating fairness
If it’s necessary to keep these types of clauses, a number of other techniques that will make them fair.
- Allow the other party to have a say in what the contract requires. It takes two to tango, so anyone who negotiates on a take-it-or-leave-it basis will have difficulty justifying their position.
- Don’t prejudice the parties’ ability to exercise their legal rights or do things that are necessary for the protection of both parties, like accessing insurance policies.
- Avoid allocating liability without taking into account causation.
- Use fair and balanced dispute resolution clauses that allow for an independent decision-maker to be used.
Remember, if a court decides a contract term is unfair, it will be void and common law principles will apply instead. If you didn’t want your contract to apply, you wouldn’t have bothered drafting it in the first place, so it’s worth taking a few moments to think about whether your drafting would actually hold up if it did come before a court.
By Lydia Carstensen