#167 Unfair Contract Terms - what are they & do your contracts need to change?
Unfair contract terms is a phrase you may have heard, but understanding this concept as a small business owner is more pressing now than ever before.
In the past, small businesses were exempt from certain regulations regarding contract fairness. However, as of November last year, this is no longer the case. New legislation has made it critical for small businesses to ensure their contracts do not include unfair terms and the risks for non-compliance are very real, including penalties from $50,000 to $2.5 million, or even more.
So, what exactly are unfair contract terms, and why is this so crucial for small business owners to get right?
The Changing Landscape of Contract Regulations
Starting in November last year, small businesses lost their exemptions from certain contract-related regulations. New legislation called the Treasury Laws Amendment (More Competition, Better Prices) Act 2022, falling under the broader Competition and Consumer Act, has come into play. This has placed a spotlight on unfair contract terms, mainly due to increased penalties and heightened consumer awareness.
What Makes a Contract Term Unfair?
In simple terms, an unfair contract term is one that significantly disadvantages the consumer while disproportionately benefiting the business without reasonable necessity. A common example is termination clauses in service contracts. Many coaches, for instance, have clauses that prevent clients from terminating a contract early without paying the full agreed fee, even if the services have not been fully delivered.
Impacts on Different Types of Services
This type of law isn’t black and white, which is why compliance needs to be assessed on a case by case basis. In the example of a contract termination, we need to look at the business, the terms that were agreed, the nature of the services being provided and what the business can reasonably do to mitigate their loss. The context differs across various service offerings.
One-on-one Coaching Agreements
Coaches with one-on-one services often have clauses such as “You cannot terminate early, and if you do, you must pay the full fee.” Such terms are often challenged because they unfairly demand payment for services not yet provided.
Masterminds and Group Coaching
For structured group programs where all participants start and finish together, it is more reasonable to have strict termination clauses. This is because the integrity of the group relies on full participation, and filling a spot halfway through the program is impractical.
Interior Designers
For project-based services like interior design, a middle ground is needed. Design agreements should allow for termination, but with reasonable notice and payment for work already completed. Terms like this are more likely to be viewed as fair.
What Happens If Your Contracts Are Challenged?
If a court or tribunal finds that your contract includes unfair terms, it used to be that only the unfair clause would be voided. Now, an entire contract can be invalidated, leaving your business with zero protection. Penalties for such infringements range from $50,000 to $2.5 million, making it absolutely vital, now more than ever, that all your contract terms are fair and compliant.
Then you’re not only in a position where you have a hefty penalty and can’t enforce your contract, but you have a disgruntled client who will likely share details of their experience, which is less than positive.
As a small business owner, making sure your contracts are fair and legally compliant is crucial, not only for avoiding legal issues but also for creating a sustainable business. If you’re unsure whether your contract terms are fair, now is the time to act. Feel free to reach out to me for a chat, I’d love to hear from you.
Full Transcript:
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[00:00:20] Tracey: I have got a lot to say about unfair contract terms in your contracts as small business owners. And the reason I've got a lot to say about this is because it is so important, more important, in fact, now than ever before. The reason for that is because once upon a time, small businesses were exempt from these types of regulations, but now they're not.
[00:00:43] As of November last year, small businesses are no longer exempt and there's penalties so there are serious consequences if your contract is found to include unfair contract terms and it's challenged and it's taken to court by consumer. So not only can the whole contract be set aside completely leaving you with nothing, but there's penalties.
[00:01:07] There's dollar value penalties and those penalties range from anywhere between 50, 000 to two and a half million dollars, sometimes more. So it's more important now than ever for small business owners to get this right. That's why I'm diving into this podcast episode with you today.
[00:01:24] So unfair contract terms, they've always been around, but there's a bigger focus on this now because one, it's so serious for small businesses for the reasons I've just explained, but two, consumers becoming more and more aware of their rights, they're becoming more and more aware of the dialogue that's being canvassed in business communities and platforms.
[00:01:48] So November last year saw changes. It saw changes to the law. There are some specific pieces of legislation that introduced changes that makes this really important for small business owners. And those changes relate to a new piece of legislation, which is called the Treasury Laws Amendment more competition, better prices at 2022. And yes, I had to write that down. And this sits under the competition and consumer act. So I always talk on this platform and to my clients about the Australian consumer law and the rules that govern what type of things service providers need to disclose to their clients.
[00:02:29] The consumers, but I'm diving deeper now, and I'm going beyond the consumer law into these really important pieces of legislation, because we all need to know about it if we are to set up businesses up for long term, sustainable success. So, you know, me well enough by now, if you're a long time listener to know that my focus is very much on prevention being better than cure in business.
[00:02:53] There is just no need for businesses these days to end up in a dispute where they need to call a litigation and disputes lawyer, like where I spent the first 12 years of my career in litigation and disputes. There's no need for businesses to end up there anymore because there is so much information available to us, now more than ever, on what it is we need to be doing to protect our businesses and set us up for long term sustainable success.
[00:03:21] Information is so easy to get our hands on and it's my belief, both professionally and personally, that in this day and age, ignorance is a choice. That can be an unpopular opinion that can be confronting to many, but that's not intended to be that way. Ignorance is a choice because information is available.
[00:03:40] The challenge lies in how it is that we get our hands on the right information to help us. Because the downside to there being so much information is that we don't know what is the right information and what's not. And that's why I'm here and that's why I deliver this podcast so that, you know, as a small business owner, as a coach, creative or consultant, what it is that you need to be focusing on. You can get the information here that applies to you that's relevant and that's right.
[00:04:08] So when it comes to the consumer law, you would have heard me talk on this podcast a lot about sequencing with your client service agreements and your proposals and your terms and conditions, making sure that your clients have an opportunity to review your terms before they decide to engage with you, that's all consumer law focused. It's all set out in the consumer law in various places, which says if you as a business owner want to have the protection of your contracts and you want the consumer law behind you, you've got to do things in the right way. So I draft contracts for clients, I support clients in their sequencing and their processes and systems to get this right.
[00:04:51] Now, though, we have to focus on what goes into those contracts, and that is where this discussion is coming from in terms of unfair contract terms. We know the focus has been on unfair contract terms since November last year, when the legislation that I outlined at the beginning of this episode came into play. And that took away the exemptions for small business owners. So businesses with fewer than a hundred employees and less than 10 million annual turnover. That's most of us. That's most of my listeners. So the exemption for small businesses defined that way is now gone. So you now need to be paying attention to any unfair contract terms that you have in your client service agreement, your design agreement, your client T's and C's, whatever you choose to call them.
[00:05:44] We need to make sure not only that you've got them tailored for your business and that they're working properly, and you've got the sequencing right and you implement them in accordance with your processes and systems consistently, but we now need to make sure there's nothing in there that could be deemed an unfair contract term.
[00:06:02] I'm going to talk about what an unfair contract term is, and then I'm going to explain what can happen If your contracts do have an unfair contract term, and I'm going to call it, I'm going to be really blunt and honest here and say that my experience, what I'm witnessing over the last six months has been the biggest impact on coaches. And these are coaches who are offering one on one services with clients. I'm not talking masterminds, I'm not talking memberships, I'm talking the one-on-one containers where coaches have clauses in their contracts that say you can't terminate early. This is a six, nine or a 12 month container.
[00:06:41] You can't terminate early. If you do, you must pay the full fee. That is an unfair contract term and coaches are getting challenged the most, both people reaching out to me to seek my assistance to challenge those terms and coaches reaching out to me to seek my assistance to refute those challenges. And then ultimately to redraft their coaching agreements.
[00:07:03] This is not something that can be ignored. This won't go away if we stick our head in the sand. So an unfair contract term, in general terms, is a term in a contract which gives the business the power, it's disadvantageous to the consumer, and it's not reasonably necessary to protect the interest of the business.
[00:07:22] Termination clauses are a massive focus right now because of that. So we've got termination clauses like what I've just outlined. One on one services so the service hasn't been provided yet. The value hasn't been provided yet. You've signed up to say a nine or a 12 month coaching container with a service provider, the coach, you've gotten three months in and the consumer, the client realizes this is not for me.
[00:07:48] or my circumstances have changed or something like that. They reach out to the service provider, the business, the coach, explain that and the coach says, "no, you've signed up to my contract. You've agreed to my terms. You have to pay the f ull amount. You can't get out early." The coach then which has been reported to me on several occasions, says something like I'm teaching you to honor boundaries.
[00:08:13] I'm honoring myself. I'm respecting myself. I'm asserting my boundaries as a professional. I'm going to do you a service by not letting you just pull out of something because you've changed your mind. I'm teaching you what it's like to make a commitment. I'm going to call BS on that for two reasons. One, you're not the mother.
[00:08:30] You're not someone's mother. not up to you to teach them that lesson. And two, it's not lawful. it's just not lawful. So what happens in those circumstances is there's argy bargy, there is a professional breakdown of the relationship. It leaves a distaste in the mouth of the consumer. And then the business owner runs the risk of not only not being able to enforce their contract, but having a really disgruntled client, soon to be former client, who then shares details of their experience, which is less than positive. So it doesn't end well for the business on any view, the service simply hasn't been provided. So the court looks at this as an unfair contract term, because the business is seeking to be paid for something that they haven't yet delivered.
[00:09:14] The consumer has not got the value and On any of you, there is opportunity for that business to seek to fill the place of the client wanting to leave with another client to reduce revenue loss. So what we need to do here is have a look at this in the context of the business. So this is all case by case.
[00:09:35] It is not black and white. You know by now from listening to this podcast that very rarely in the law, this type of law, is there black and white as much as we'd love there to be. It needs to be assessed on a case by case basis. Have a look at the business, the terms that were agreed, the nature of the services being provided and what it is that the business can reasonably do now to mitigate their loss. So to find another client to come in to take that person's place so that the business is reducing their loss, which is a loss of revenue.
[00:10:05] So it's just not feasible for a coach to say, we're three months into a nine or 12 month container. You have to pay the balance because I've lost revenue. What the coach needs to do when they're preparing their contract or their terms is make sure that they have a termination policy that's reasonable. For example, if your circumstances change, reach out and talk to me, we'll have a conversation. See if we can resolve it. See what we can do. But in any event, if you do need to terminate early, then I need 60 days notice or 90 days notice and the reason for this is, and explain, I need to take steps to fill the spot, et cetera, et cetera, to mitigate my loss, to bring in other revenue. That needs to be considered by the coach. When they're developing these terms and conditions or this coaching agreement.
[00:10:55] That is distinct from say a mastermind. On the flip side here. If we're talking a mastermind, let's say a six or a nine month mastermind, and it's a closed intake, So mastermind starts on this date. It's closed. It's really important for the integrity of the group that everyone contributes, that everyone shows up, everyone gets to know each other.
[00:11:16] We work through these modules or this is, it's a thematic approach. So these are the themes. This is what we do. This is how I deliver it. It wouldn't be reasonable or feasible halfway through for someone to leave and expect the host of that mastermind to simply fill that spot halfway through. It's not going to work because of the nature of the service.
[00:11:36] So you can see the difference between a mastermind, for example, and a one on one coaching container. You can see the difference. And this is why we need to look at these scenarios, these service offerings on a case by case basis to determine what's reasonable in the circumstances for that offering. So that gives some context around unfair contract terms in the coaching space.
[00:12:00] Let's take interior designers. If we've got a project and you have provided your scope of work or your proposal to the client and your terms and conditions, it's not reasonable to say to the client, you cannot terminate at any point. This is a 70, 000 project. These are the phases or the stages, however you choose to frame it.
[00:12:23] And you can't terminate at any point and if you do, you have to pay me everything. That's not reasonable. Of course it's not. And no one would suggest otherwise, surely. But what is reasonable would be to say, I'm going to charge this way. And let's just say it's stages or phases. If your circumstances change and you need to terminate or in some cases pause, but let's just focus on terminate, I need this much notice. Let's say 30 days, 60 days notice, you'll need to pay me for everything I've done up until the date of termination. And the reason I need this much notice is because it's going to affect my workflow and I need to then engage other clients or go out to other clients who are a little further down in my pipeline to bring them forward so that I can mitigate my loss and so that I can reduce the period of time where I'm losing revenue because I've committed that time to you. So you can see the importance of why it is these clauses need to be drafted particular to each service and each business because different businesses and different offerings will have different considerations of what's reasonable and what's not in the context of termination. There are, of course, other clauses that can be deemed unfair, but I'm focusing on termination now because this one comes across my desk almost weekly and has done since the end of last year.
[00:13:38] So I know then that this will be resonating with you on some level, whether you are the business owner, and you now need to think about reframing your termination clause, or whether you've engaged another service provider, and you're thinking about how it is that you're going to exit that arrangement.
[00:13:53] The unfair termination clause consideration is real, and it's important. Now, let's talk about what happens if your agreement is challenged, or if your contracts are challenged because you've got unfair contract terms. If that happens, if you can't resolve it directly with the client and the client takes it to a court or tribunal, that court or tribunal can have a look at your contract.
[00:14:18] And as opposed to before and before being, if a court or tribunal found that one of the clauses in your contract was unreasonable, it could just delete that particular clause. So it would void that clause. Now the courts have power to void the whole agreement so they can erase your whole agreement on the basis that it contained an unfair contract term or terms, which means you're left with nothing.
[00:14:44] Zero protection. And if things go further, you can be hit with a penalty of between 50, 000 to two and a half million dollars, sometimes more depending on your structure and depending on the nature of the term. So. The risk to businesses is very real. So it's more important than ever to get this right and to get it right now so that you have peace of mind that when you're issuing your contracts to your clients, they don't contain unfair contract terms. They are setting you up for long term sustainable success and that is the peace of mind that I talk about on here so often.
[00:15:24] So now's the time to ask yourself, do your contracts need to change? I've explained the concept of the unfair contract term, why it came into place, how it applies, things to think about. I've explained to you why it is more important now than ever to get this right. And I'm sure if you're a long time listener, the pieces to the puzzle continue to complete for you in terms of why I say DIY is for bunnings, not for your legals.
[00:15:55] There is a level of complexity to the drafting of these things that shouldn't be overlooked. Templates, DIYs, Google, copying from a friend. We do what we do at the time with the information we have, but when we know better, we do better. And you, my friend, now know better.
[00:16:11] So if you're not sure, if your contracts are right, if, in fact, you know deep down that they're not, but you've been putting it off, please let this be your friendly nudge that this is not something that should be put off any longer because there are serious consequences if something goes awry.
[00:16:29] And if you're a business owner who has been in business for a long time and you've never had your contracts done properly and you've never had an issue, kudos to you. You are lucky and I hope it continues, but I'm risk averse for my clients. Let's not challenge it. Let's not tempt it and let's not put it off any longer is my heartfelt message for you today.
[00:16:53] If you're not sure, reach out. Let's have the conversation. If you are sure that now's the time to work with someone to get these things reviewed in your business and set you up properly now for long term sustainable success, Then again, let's have the conversation. You're most welcome to reach out via Instagram DMS via my website, TMsolicitor.com.Au. You Or you can book a time to have a chat directly via the website. It's that simple. I hope you have found this episode to be really helpful.
[00:17:23] And I hope that it's answered your questions around this term, unfair contract terms that you've no doubt been hearing about for a while. If it resonates, if you found it helpful, Please feel free to share the episode with even more business owners. It would mean the world to me. And that is how we get the podcast into the ear of even more business owners that we can help.
[00:17:40] Thank you so much for listening. As always, I appreciate your time and I'll catch you next week.
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