Final countdown to Australia’s unfair contract terms regime

Businesses are encouraged to remove or amend any unfair contract terms in standard form consumer or small business contracts that will be entered into, renewed or varied after 9 November 2023, when reforms to Australia’s unfair contract terms regime under the Australian Consumer Law (ACL) take effect.

After Parliament passed the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) last year, businesses will now be prohibited from proposing, using, or relying on unfair contract terms in standard form contracts with consumers and small businesses.

The class of contracts that are covered by the unfair contract terms provisions will also be expanded, and significant civil pecuniary penalties for breaches will be introduced for those who don’t follow the terms and conditions.

What contracts are covered?

A contract will fall within the scope of the unfair contract terms regime under the ACL if the contract is:

• a standard form contract for goods or services, or the sale or grant of an interest in land
• one of the parties to the contract is a small business or consumer.

Standard form contracts are generally contracts where terms and conditions are put forward by one party with the other party not being given an opportunity to negotiate or amend those terms and conditions. Under the current ACL provisions, the court may consider a list of factors when determining whether a contract is a standard form contract, including:

• whether one of the parties has all or most of the bargaining power
• whether the contract was prepared by one party before any discussion of the transaction
• whether the other party was effectively required to accept or reject the terms of the contract – effectively ‘take it or leave it’
• whether the other party was given an effective opportunity to negotiate the terms
• whether the terms of the contract take into account the other party's specific characteristics.

The reforms broaden these factors to include repeated usage of the same or a substantially similar contract and the number of times this has been done. Under the new regime, 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.

There is also a rebuttable presumption that a contract is a standard form contract, so the onus will be on the party seeking to argue that it is not standard form.

The changes also apply to “small business” contracts and will now apply to a larger number of small business contracts by amending the employee threshold and introducing an annual turnover threshold.

As a result of these reforms, more businesses will be able to seek the protection of the unfair contract terms regime with the employee threshold increasing from 20 to 100 employees. Regardless of employee numbers, a party may still meet the small business definition if its annual turnover is less than $10 million at the time the contract is entered, renewed or varied. The reforms also remove the upfront price payable threshold which is currently $300,000, or $1 million if the contract is for more than 12 months.

The regime also applies to “consumer contract” which is a contract for the supply of goods or services or a sal or grante of an interest in land, to an individual who acquires the goods and services for wholly or predominantly domestic, household or personal use or consumption.

What is an unfair contract term?

A term in a consumer or small business standard form contract will be considered unfair if all the following elements are satisfied:

• the term would cause a significant imbalance in the parties’ rights and obligations under the standard form contract
• the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term
• the term would cause detriment (financial or otherwise) to a party if the term was applied or relied on.

Noting that there is a rebuttable presumption that the term is not reasonably necessary.

In determining whether a term of a standard form contract is unfair for the purposes of the threshold test, the courts have discretion to consider any matter that it considers relevant, but must assess the fairness of a particular term in the context of the contract as a whole and take into account the transparency of the contract in question. However, it is noted that a term that is transparent and clear may be found to be an unfair term.

Are there consequences for failing to comply?

While the unfair term test remains unchanged under the new regime, the proposal, use, application, or reliance on unfair contract terms in standard form consumer or small business contracts is now prohibited and the use of unfair contract terms will now attract significant new pecuniary penalties.

The maximum penalty that can be ordered for an individual will be $2,500,000. For a body corporate, the maximum penalty will be the greater of:

• $50 million
• three times the value of the benefit that the body corporate obtained directly or indirectly and that is reasonably attributable to the act or omission, where it can be determined
• 30 per cent of the body corporate’s adjusted turnover.

Further, where courts previously found a term in a standard form contract to be 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
• make orders preventing the same or a substantially similar term from being included in future contracts
• grant an injunction preventing a party from entering into a future contract or relying on an existing contract containing a similar term
• make adverse publicity orders or 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 should businesses do now?

These new laws significantly increase the risks for businesses that continue to use unfair contract terms in their standard form contracts with small businesses and consumers.

Businesses are therefore encouraged to take proactive steps to manage these to prevent non-compliance and avoid potential liability, including:

• identifying all contracts that are captured by the updated definition of small business contract, carefully reviewing them and amending or removing terms that may be considered unfair clauses
• introducing a small business customer due diligence process to know whether the regime applies and updating this information on a regular basis
• changing the way you record your negotiations to be able to demonstrate that clauses have been negotiated
• drafting standard form contracts in simple language, and for terms to be as broad as reasonably necessary to protect legitimate business interests
• drawing key terms to the attention of small business customers during the sign-up process, and any renewal process
• expressly advising small business customers that the standard form contract comprises proposed terms that can be negotiated
• providing ongoing staff training to ensure personnel involved with the negotiation and management of the business's contracts understand the negotiation and contract management process, how the unfair contract terms regime applies, and 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.

Is it too late to review your contracts now?

The new regime does not take effect until 9 November 2023 so it is not too late to review. However we recommend you get moving. Our team can assist in reviewing, amending or removing terms from your small business contracts that may be at risk of having unfair clauses.

We can also help you develop standard form contract management systems, deliver unfair contract terms compliance training and assist with any enforcement action.

If you have any questions, please contact the team below or send us your enquiry here.

Disclaimer
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.

Published by:

Joanne Jary

Kayla Plunkett

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