In 2016, the Australian Consumer Law extended the unfair contracts regime to small businesses and introduced greater protections. Recently, the Australian Government released and undertook consultation to a draft regulation impact statement to enhance the unfair contract terms regime, which looks to strengthen protections for small businesses further. If enacted, the proposed amendments will ultimately impact all businesses operating in Australia. This article will discuss the current unfair contract terms regime, the proposed changes and how they may impact your business.
What is an Unfair Contract Term?
An unfair contract term causes a significant imbalance in the parties’ rights and obligations under the contract.
This detriment may be financial or otherwise. When determining whether a term is unfair, a court will consider a range of factors, including:
- contract transparency, such as whether it is drafted in reasonably simple and plain language;
- whether the unfair contract term is readily available or hidden in fine print; and
- the context, including whether the disadvantages of the unfair term are counterbalanced by additional benefits elsewhere.
When Does the Unfair Contract Terms Regime Apply?
The unfair contract terms regime will apply to small businesses entering into standard-form contracts for the supply of goods or services. A party is a small business if it employs fewer than 20 people when signing the contract. This includes casual staff employed on a regular or systematic basis. Furthermore, the upfront price under the contract must not exceed $300,000. In cases where the supplier provides the goods or services over a period of 12 months or more, the upfront price threshold is $1 million. The upfront price payable under a contract will include any payments for the supply that the party clearly discloses at or before entering the contract, including any defined interest amount.
A contract will be standard form if one party prepares it without the opportunity for the other side to negotiate meaningful changes to the terms. Generally, this is the party with the most power in the relationship. A party will often offer a standard form contract on a take-it-or-leave-it basis. Thus, the party with the least bargaining power will likely suffer a detriment from an unfair contract term.
Continue reading this article below the formEffect of an Unfair Contract Term
If a term in a standard form contract is unfair, that term will be void and will not be binding. However, the remainder of the contract will continue to bind the parties to the extent that it can operate without the unfair term.
If the ACCC finds your standard form contract to include unfair contract terms, they may ask your business to review and amend that contract. At this time, the ACCC cannot impose financial penalties on your business for including unfair contract terms. However, if the proposed amendments to the unfair contract terms regime are accepted, this will likely change.
Proposed Changes
Since the introduction of reforms in 2016, consumer protection bodies have received thousands of complaints about unfair contract terms. Additionally, various government bodies and consumer rights groups seek the further strengthening of these protections.
The proposed amendments aim to tackle these issues:
- introducing civil pecuniary penalties for the use of unfair contract terms;
- expanding the definition of small business to capture situations where a party has up to 100 employees or an annual turnover of up to $10 million;
- giving courts greater flexibility and broader powers to determine an appropriate remedy;
- introducing a rebuttable presumption for similar terms;
- further clarity around the definition of a “standard form contract”; and
- obliging Courts to consider whether a party has used the same or a similar contract before.
How Does This Affect Me?
The proposed amendments are likely to have far-reaching effects on many businesses. Additionally, if the updated definition of small business is accepted, the unfair contract terms regime will cover a much broader range of businesses. There may be uncertainty around the remedies that Courts could impose. This, coupled with the introduction of civil pecuniary penalties, aims to deter the use of unfair contract terms.
Furthermore, businesses that include an unfair contract term, which has previously been deemed unfair in other proceedings, will now have to prove why the term is not unfair in their circumstances.
Businesses contravening the updated unfair contract term regime may face penalties up to $10 million, three times the benefit of the conduct, or 10% of the business’s annual turnover. In addition to financial penalties, courts may issue a range of orders, such as issuing public warning notices and an order disqualifying a person from managing a corporation.
These amendments are likely to increase the complexity and regulatory risk in contracting.
You may also want to start monitoring court decisions in relation to unfair contract terms involving parties within your industry.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Key Takeaways
The Australian Government is currently considering a wide range of proposed amendments to the unfair contracts regime that, if introduced, would significantly change the contracting landscape and impose heavy obligations on businesses when entering into standard-form contracts. The proposed amendments are likely to capture a much broader range of businesses. You will need to review your standard form agreements to ensure they do not contain any unfair contract terms. This is vital as the proposed penalties for such terms are significant.
If you need help with unfair contract terms, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
An unfair contract term causes a significant imbalance in the parties’ rights and obligations under the contract, yet, it is not reasonably necessary to protect the legitimate interests of the party who would benefit from the term and would cause detriment to the other party if it were to be relied upon. This detriment may be financial or otherwise.
Courts will consider the transparency of the contract, whether the unfair term is readily available or hidden in fine print and the contract context, such as whether the disadvantaged party obtains a counterbalancing benefit elsewhere in the contract.
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