Making sure all is ‘fair’ in council contracts!

LG Leader July 2017

The expanded unfair contract provisions of the Australian Consumer Law (the “ACL”) have been in force since November 2016. They have implications for all standard form contracts that councils enter into. If you have not yet turned your mind to them, now is the time!

The provisions prohibit the inclusion of unfair terms in certain standard form contracts where one of the parties is a small business (which is a business that employs fewer than 20 persons).  This includes contracts for the supply of goods and that confer an interest in land.

There is no exhaustive definition of what constitutes a standard form contract for the purposes of the ACL. A contract will likely be considered a standard form contract for the purposes of the ACL where it has been prepared entirely by one party and its terms are not open to negotiation (i.e. the other party is required to enter into it on a ‘take it or leave it’ basis) or, where one party has all or most of the bargaining power. Such contracts may include:

• contracts for the purchase of goods from suppliers, including council ‘Purchase Order’ terms and conditions;
• hire Agreements for the use of council facilities; and
• leases or licenses entered into by councils with community organisations, including local sporting bodies.

It is essential that when standard form council contracts are being prepared and entered into with a party that is a small business, care is taken to ensure that unfair terms are not included. An unfair term is one that:

• causes a significant imbalance in the parties’ rights and obligations under the contract;
• would cause detriment (financial or otherwise) to a party if it were to be relied on, and
• is not necessary to protect the legitimate interests of the party who would be advantaged by the terms.

By way of example, the following terms may be unfair and in breach of the ACL:

• a provision in a lease that gives a council (as lessor) the right to take possession of, and deal with, the lessee’s property at the expiry of the lease at the lessee’s expense and without giving the lessee prior notice;
• a provision that requires a licensee to grant a broad indemnity to the Council (as licensor) in respect of all damage or loss occurring on the licensed premises notwithstanding that the licensee does not have exclusive access to, and use of, the premises; and
• cost recovery provisions in council contracts that confer a right on the council to recover all its costs and expenses, as opposed to its reasonable costs and expenses.

If a term is found to be unfair, it will be deemed void and struck out completely, To the extent that the balance of the contract is capable of operating without the unfair term, then it will continue to bind the parties. In the case of an unfair indemnity clause being stuck out, this could have serious consequences for a council that has sought to rely on the indemnity to recover certain costs or damages incurred.

In light of the above if the council has not yet reviewed its standard form contracts to ensure compliance with the ACL, it would now be prudent to do so. Of course, if you would like our assistance with this task, please do not hesitate to contact us.