15/06/23 | Reading time: 3 minutes
Unfair contract terms regime
Australia currently provides protections, via the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), against unfair contract terms (Unfair Contract Terms Regime).
The Unfair Contract Terms Regime applies to consumer contracts and small business contracts that are considered standard form contracts.
Significant changes to the Unfair Contract Terms Regime will apply from 9 November 2023.
What are unfair contract terms?
Under the Unfair Contract Terms Regime, a term of a consumer contract or small business contract may be considered unfair if the term:
(a) causes a significant imbalance in the parties’ contractual rights and obligations;
(b) is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
(c) could cause detriment to a party if enforced.
What are standard form contracts?
A consumer contract or small business contract is presumed to be a ‘standard form contract’ unless the other party proves otherwise. The Unfair Contract Terms Regime sets out several matters that a court must take into account when determining whether a contract is a standard form contract.
Under the new laws, the court will also need to take into account whether one of the parties has made another contract on the same or substantially similar terms, prepared by that party, and if so, how many such contracts that party has made.
Additionally, the new laws make it expressly clear that a court may now determine that a contract is a standard form contract despite the existence of any of the following:
(a) an opportunity for a party to negotiate changes, to terms of the contract, that are minor or insubstantial in effect;
(b) an opportunity for a party to select a term from a range of options determined by another party;
(c) an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.
Who will be protected?
The new changes will extend the Unfair Contract Terms Regime protections to a wider range of small businesses by changing the definition of ‘small business contract’ to be a contract where at least one party satisfies either of the following conditions:
(a) someone who employs 100 or less (up from 20); or
(b) businesses with an annual turnover of less than $10 million.
The current Unfair Contract Terms Regime applies where the upfront price payable is not be more than $300,000 or, if the contract is longer than 12 months the upfront price payable is not be more than $1 million But this requirement will no longer apply from 9 November 2023.
What are the consequences?
Under the current regime, the consequence for an unfair contract term is that the court may declare the term ‘void’ (ie not enforceable). However, the rest of the contract remains and there are otherwise no penalties.
Under the new laws, not only will unfair terms be unenforceable, but their inclusion or application in standard form contracts will be prohibited. This means that businesses could face penalties simply for including such terms in their contracts, even if these terms are not enforced.
What are the penalties?
The maximum penalty for companies under the ACL is the greater of:
(a) $50 million;
(b) if the court can determine the value of the benefit obtained – 3 times the value of the benefit; or
(c) if the court cannot determine the value of the benefit – 30% of the adjusted turnover during the breach turnover period for the offence, act or omission (up from 10% annual turnover of the body corporate).
The maximum penalty for companies under the ASIC Act is the greater of:
(a) $10.5 million;
(b) 3 times the value of the benefit received as a result of the breach;
(c) 10% of the business’ annual turnover.
What can you do to prepare for the changes?
This is a critical time for businesses. It is essential to scrutinize your standard form contracts to ensure they will comply with the enhanced Unfair Contract Terms Regime. Not doing so could result in hefty penalties and reputational damage.
However, it’s not all about avoiding penalties. Ensuring your contracts are fair and transparent can build trust and loyalty among consumers and small businesses. It sends a powerful message that you value their rights and interests.
Here are some specific action steps:
1. Contract review
Begin with a comprehensive contract review of your standard form contracts. Consider seeking professional legal advice to confirm all terms are fair and comply with the new laws.
Ensure your team understand the changes and their implications for your operations. Consider training sessions for your team on how the new Unfair Contract Terms Regime operates.
3. Continuous monitoring
Stay up to date with any additional guidance from ACCC and ASIC.
Change can be daunting but remember that these changes are designed to promote fairness and transparency. By ensuring your contracts meet the new laws, you’ll not only avoid potential penalties but also hopefully strengthen your relationships with consumers and small businesses.