Australian consumer awarded A$5.5m in damages after successful ‘unfair contract term’ claim

This reminder is particularly relevant for industries where standard form contracts are commonly used, including the construction industry.

In this case, the court awarded a retail consumer more than A$5.5 million in damages following a successful claim that a provision in a standard form contract was void as an ‘unfair contract term’.

An unfair contract term

Adam Tomasso made a significant windfall gain when trading derivatives on an online platform operated by UK-based company IG Markets during just over 30 minutes of trading, resulting in profits of over A$5.5 million (approx. US$3.225 million).

A few hours later, IG Markets blocked his account and reversed the transactions. According to IG Markets, Tomasso’s big win was an error that had occurred because of one of IG Markets' employees inadvertently making certain internal ‘test markets’ available to clients to trade on the platform.

To justify reversing the transactions, IG Markets relied on a clause in its standard form contract with Tomasso. The clause allowed IG Markets to void or amend the terms of any transaction where a transaction contained or was based on an error, and IG Markets reasonably believed the error was obvious or palpable.

Tomasso argued that the clause was an unfair contract term and was void under the Australian Securities and Investments Commission Act 2001 (Cth).

The court agreed with Tomasso, and decided:

• the term created a significant imbalance in the parties' rights. In particular, the right to amend or void the transaction was only exercisable by IG Markets, and IG Markets was given all the rights as to what action, if any, should be taken as a result. The liability consequences were also one sided, with IG Markets requiring amounts to be paid back by the customer, without any obligation for IG Markets to make a similar repayment to the customer if the roles were reversed. 
• the term was not reasonably necessary for the protection of IG Markets legitimate interests. Instead, IG Markets legitimate interests could have been protected by a more balanced clause; and
• if relied upon, the clause would cause significant financial detriment to Tomasso.

The court said that even though the clause was found to be reasonably transparent, this was not sufficient to overcome its substantive unfairness and ruled it was void in its entirety.

Lessons for industry

This decision is a sobering lesson for businesses that commonly use standard form contracts, including the construction industry.

Under Australia’s unfair contract terms regime, which was expanded in 2023, any standard form contract with an individual or small business with less than 100 employees or a yearly turnover of less than A$10 million is capable of challenge on the basis of being “unfair”.

A large number of subcontractors and suppliers in the construction industry will be within the range of the legislation. A failure to comply could see part or all of a company’s standard form contracts declared void, claims for damages and relief brought by the disadvantaged counterparty and significant penalties imposed by the regulator.

As this 94-page judgment demonstrates, whether a term is substantively unfair is a complex assessment. But there are certainly some important ‘lessons learned’ from this judgment that should guide standard form contract drafting going forward.

While a clause granting a unilateral right or discretion is not inherently unfair, such clauses are vulnerable to claims of unfairness. When drafting a standard form contract, it is advisable to consider whether such rights should be reciprocal or, if not, whether they are proportionate and balanced. Consider too the consequences of the exercise of unilateral powers: a unilateral power that grants an appropriate remedy to the other party, for example a right to be made financially whole after a unilateral termination for convenience, may make the unilateral power less vulnerable to challenge through the courts.

Even where a legitimate commercial interest can be established, the court will still consider if other, less burdensome options are available to protect that legitimate commercial interest. If one exists, the clause may still be ruled unfair.

A clause is more vulnerable to challenge if it would result in financial loss to the disadvantaged party, if relied upon, and courts are likely to be unwilling to read down or sever clauses that are substantively unfair – they are more likely to be declared void in full.

It is also worth noting that transparency is not enough to overcome substantive unfairness. A clause is not fair because it is transparent and vice versa. So, while prominent disclaimers and plain English drafting might assist, they will not be a complete protection.