Amendments to the unfair contract terms regime could mean big penalties for small businesses
Amendments to the unfair contract terms regime (“Regime”) under the Australian Consumer Law (“ACL”) and the Australian Securities and Investments Commission Act 2001 (Cth) are set to come into effect on 9 November 2023.
These amendments will broaden the scope of contracts that will fall within the Regime and may have a significant impact on small businesses and companies that regularly draft, negotiate, and enter contracts.
The changes will also introduce harsh penalties on businesses and individuals who include unfair contract terms in their standard form contracts (as opposed to only being declared unfair and therefore void).
What is a standard form contract?
Firstly, companies will need to turn their mind to whether they will be captured by the Regime either by being captured under the amended definition of small business, or whether their contracts are determined to be “standard form contracts”.
It is important to note that there is a presumption that a contract is a standard form contract, and the burden is on the party that prepared the contract to prove that it isn’t.
Typically, a standard form contract is a contract used by a business that is pre-written and used for all their customers. Typically, customers cannot change any, or many of the terms in the contract. These are considered “take it or leave it contracts”.
To consider whether a contract is a standard form contract, the following factors are relevant:
- Is there an inequality in bargaining power between the parties?
- Is the contract pre-prepared?
- Are the terms of the contract on a “take it or leave it” basis?
- Is there little to no opportunity to negotiate the terms of the contract?
- Is it a commonly used contract? and
- Is the contract specific to the parties’ circumstances?
Small business contracts
Amendments will also be introduced to expand the definition of a small business. Currently, small businesses are protected from unfair terms in standard form contracts for products, services, or land transactions if:
- They have 20 or fewer employees; or
- The upfront price payable is under $300,000, or $1 million for contracts lasting more than 12 months.
However, from 9 November 2023, the thresholds above will be replaced, and the definition of a small business will be expanded to offer protection to more businesses. A small business will be protected by the Regime for any new or varied standard form contract from that date if they:
- Have 100 or fewer employees, or
- Make less than $10 million in annual turnover.
Unfair Contract Terms and Penalties
Contract terms are unfair if they:
- Cause a significant imbalance in the rights and obligations of the parties under the contract;
- Are not reasonably necessary to protect the legitimate interests of the party who gets an advantage from the term; and
- Would cause financial or other harm to the other party if enforced.
Examples of terms that may be unfair include terms that allow one party but not the other to:
- Avoid or limit their responsibilities under the contract;
- End the contract;
- Change the terms of the contract; or
- Penalise one party (but not the other) for breaching or ending the contract.
Prior to the introduction of these changes if it was determined by the Court that a term of a contract was unfair, the term will be deemed void, and it would no longer apply to the parties to the contract.
From 9 November 2023, significant penalties will be imposed on businesses using or relying on unfair contract terms. The maximum financial penalties for businesses under the new unfair contract terms law are the greatest of:
- Three times the value of the “reasonably attributable” benefit obtained from the conduct, if the court can determine this; or
- If a court cannot determine the benefit, 30 per cent of adjusted turnover during the breach period.
The maximum penalty for an individual is $2.5 million.
In 2022, we saw the ACCC take Fuji to court over unfair contract terms and it was determined that 38 of the contract terms were unfair and in breach of the Regime.
In 2021, ASIC took action against the Bank of Queensland (“BOQ”) and the Federal Court declared several terms of BOQ’s small business contracts unfair.
Business owners should be making enquiries to work out whether:
- their contracts with businesses/small businesses are caught by the regime; and
- their standard form contract is ‘fair’.
If you require assistance with reviewing or amending your contracts to ensure compliance with the new Regime, feel free to contact our office to arrange a consultation with one of our experienced lawyers on 9375 3411.
About the Authors: This article has been co-authored by Chanelle Kane and Steven Brown. Chanelle has been in the industry since 2013 and graduated with a Bachelor of Laws in 2020. Chanelle completed the Graduate Diploma of Legal Practice with the College of Law in 2020 and was awarded the 2020 PLT Professional Excellence Award for the cohort. Chanelle was admitted to practice in the Supreme Court of Western Australia in November 2020 and to the High Court of Australia in January 2021. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.