Unfair contract terms in standard form consumer or small business contracts are now illegal after after new laws took effect on 9 November 2023.
The changes to the Australian Consumer Law (ACL), contained in the Treasury Laws Amendment (More Competition, Better Prices) Act 2022, also expand the class of contracts covered by the unfair contract terms regime and introduce significant civil penalties for businesses that include unfair terms in their standard form contracts.
Businesses are therefore encouraged to review their standard form contracts and remove or amend any unfair contract terms, while contracting parties should consider whether they are protected under the reforms.
What contracts are covered?
A contract will be within the scope of the unfair contract terms regime if it is a standard contract for goods or services or the grant of an interest in land, and one of the parties to the contract is a consumer or small business.
While a standard form contract is generally one where terms and conditions are put forward by one party, with the other party unable to negotiate or amend those terms and conditions. For example, some home building contracts or funeral services contracts.
Prior to the reforms, a court would determine if a contract was a standard form contract by considering factors including whether one of the parties had all or most of the bargaining power, and whether the contract was prepared by one party before any discussion of the transaction.
Additionally, a contract would be considered a standard form contract if the other party was required to accept or reject it, that is, ‘take or leave it,’ and whether the other party was given an opportunity to negotiate the terms.
The new laws broaden these factors to also include the repeated use of the same or similar contract, and the number of times this has been done. While a contract may also be a standard form contract even where parties have negotiated minor or insubstantial changes or selected from predetermined contract term options.
While more small businesses will be protected by these reforms, which change the threshold for the number of employees and the small business’s annual turnover. Under the previous regime, small businesses had to have less than 20 employees, whereas now the number has increased to 100. Even if the organisation has more than 100 staff, they will still meet the threshold if their turnover is less than $10 million at the time the contract is entered, renewed or varied.
How is an unfair contract term defined
A term in a consumer or small business standard form contract will be considered unfair if the term would cause a significant imbalance in the parties’ rights and obligations, it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term and it would cause detriment – either financial or otherwise – to a party if the term was applied or relied upon. The courts may also consider the fairness of the term in the context of the contract as a whole and take into account the transparency of the contract in question.
What are the consequences of a failure to comply with the new law?
The reforms introduce significant penalties for businesses and individuals that include unfair contract terms in their standard form consumer or small business contracts.
For an individual, the maximum penalty is $2,500,000. While companies may be fined up to $50 million; or three times the value of the benefit obtained; or 30 per cent of the company’s adjusted turnover.
Further, where courts previously found a term in a standard form contract unfair, it was automatically void. The reforms introduce additional remedies, extending the courts’ powers to make orders voiding, varying or refusing to enforce all – or part – of a contract. The court can also make orders to prevent the same or a similar term from being used in future contracts. Power has also been given to the court to make adverse publicity orders, disqualify a person from managing a corporation, or both.
These are significant consequences for businesses and should not be treated as being the cost of doing business.
What actions should businesses take now?
Businesses should proactively manage potential non-compliance to avoid liability.
Business should identify all contracts captured by the updated definition of small business contract, carefully review them and amend or remove terms that may be considered unfair.
Small business customer due diligence processes could be introduced to clarify whether the regime applies to a contract and update this information regularly. Negotiations with contracting parties should be clearly recorded to demonstrate that clauses have been discussed. It is also important to remember that standard form contracts need to be drafted in simple language and include terms only as broad as necessary to protect legitimate business interests.
Businesses should draw key terms to the attention of contracting parties during the sign-up or renewal process, this is a simple step that can help with compliance, and they should expressly advise customers that the standard form contract comprises proposed terms that can be negotiated.
Finally, it’s important to provide ongoing staff training to ensure personnel involved with negotiating and managing the business’s contracts understand the negotiation and contract management process, how the unfair contract terms regime applies, the consequences of breaches and the significance of penalties.
By understanding and maintaining key responsibilities and obligations under the new unfair contract terms regime, businesses will remain compliant and able to operate efficiently while also ensuring small business customers are treated fairly.
By Joanne Jary, Partner, and Kayla Plunkett, Lawyer, at Holding Redlich
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.