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In November 2020, the federal Treasury announced that the Unfair Contract Terms laws would undergo significant reform. This announcement followed on from a meeting of the Ministers for Consumer Affairs, who agreed that consumers needed increased protection. 

The Unfair Contract Terms laws protect consumers and small businesses from unfair contract terms. The laws apply to standard form contracts, where consumers or small businesses cannot negotiate the terms. For example, when a consumer must click ‘I agree’ to the terms of an online purchase.

The anticipated reforms will expand who the laws apply to and allow courts to issue severe penalties for non-compliance. 

The draft legislation for the reforms is expected in the first half of 2021. As a small business owner, you need to be aware of the changes so you can ensure that your contracts are compliant, or you will risk severe penalties. This article explains the:

  • current legislation;
  • forthcoming changes; and
  • their implications for businesses.

Current Unfair Contract Terms Laws

Under the current laws, standard form contracts cannot contain unfair terms. If they do, a court can decide that the unfair term can be ignored and not enforced by the business that imposed it.

The Unfair Contract Terms laws apply to standard form consumer contracts and small business contracts. Consumer contracts are contracts for products, services or land acquired for personal, domestic or household use. Small business contracts are contracts where small business owners are likely to be involved, and where the upfront price payable under the contract is no more than $300,000 (or $1 million if the contract is for more than 12 months). 

Under the current laws, a term may be unfair, and therefore unenforceable, if:

  • the rights and obligations are significantly imbalanced;
  • it does not protect both parties and their business’ legitimate interests; or 
  • it could cause either party’s business damage.

Some standard unfair contract terms include:

  • the contract renewing automatically, without approval;
  • unilateral rights to change the contract without notice or negotiation; and
  • indemnities or limitations of liability that are one-sided in favour of the business issuing the contract. 

What Reforms Are Expected To Unfair Contract Terms Laws?

The timeframe for the reforms is not yet confirmed. However, it is essential to know what the reforms include to ensure your business is ready. You can also avoid reputational damage and the risk of going to court by ensuring your contracts are fair.

What is a Small Business?

Under the changes, the definition of a small business will change. As a result, the number of businesses eligible for compensation will increase significantly. Under current law, a small business has fewer than 20 employees; this will increase to businesses with fewer than 100 employees. The laws will also introduce an annual turnover threshold of less than $10 million to replace the upfront contract price thresholds of $300,000 upfront or $1 million if the contract is for more than 12 months. These price thresholds will no longer apply.

What Remedies are Available?

A remedy is a consequence that a business faces for having unfair contract terms in their standard form contracts. This consequence is usually in the form of a financial penalty.

Currently, courts are unable to discipline businesses that breach the Unfair Contract Terms laws. Under the new reforms, courts will have the power to impose consequences such as significant civil penalties.

These are likely to be the higher of: 

  • $10 million; 
  • three times the value of the money earned by the business that imposed the unfair contract term (i.e. earned as a result of the unfair term); or 
  • where the court cannot determine what benefit that business obtained, then 10% of the business’ annual turnover in the preceding 12 months.

The reforms will also require businesses to demonstrate why they believe a contract term was not unfair. This requirement will apply where a court has previously found the same or a substantially similar term to be unfair when used in the same industry. 

How Will Standard Form Contracts Change?

Under the reforms, standard form contracts will include contracts where: 

  • consumers and small business can negotiate minor amendments to terms;
  • only certain types of customers can negotiate the terms (for example, enterprise customers but not smaller businesses); and
  • the customers can select from a pre-existing list of possible terms when negotiating a contract (i.e.choosing one of three options for early termination of a contract).

Some clauses may also be exempt from the Unfair Contract Terms laws, provided they meet ‘minimum standards’ or other industry-specific requirements.

For example, if certain legislation allows all waste management contracts to have 90 day termination periods, the courts will not regard the equivalent term in a contract as unfair. 

Key Takeaways

The Unfair Contract Terms laws protect consumers from unscrupulous contracts. The proposed changes to these laws, once brought into force, could result in significant penalties if your business is not compliant. For this reason, you must review your business contracts (including the terms and conditions). While the time frame for these changes is not confirmed, ensuring your current contracts are fair will help protect your business’ reputation and reduce the likelihood of a court action. It will ensure you are ready to go once the changes start. 

If you need legal assistance in having your contracts reviewed in light of these changes, LegalVision’s experienced contract lawyers can assist. Call us on 1300 544 755 or complete the form on this page. 

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