As a small business, you should know that the Australian Consumer Law (ACL) protects you from unfair contract terms. Small businesses often face a disparity in bargaining power, which might ordinarily allow larger businesses to include clauses that unfairly disadvantage and work against small businesses. However, the unfair contract terms (UCT) regime addresses this imbalance. This article will give an overview of the unfair contract terms regime by:
- explaining standard form contracts;
- providing examples of what constitutes unfair contract terms; and
- addressing the upcoming changes to the UCT regime (which will widen the gambit of the regime).
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
What is the Unfair Contract Terms Regime?
From 9 November 2023, there will be significant changes to the unfair contracts regime, expanding the criteria defining a small business and increasing the penalties for breaches of the unfair contract terms regime. The law applies to ‘standard form contracts’ entered where:
- the contract is for the supply of goods or services or the sale of an interest in land; and
- at least one of the parties is a small business. This means the business employs less than 100 people or has an annual turnover of less than $10 million.
The contract value threshold under ACL, which previously determined the applicability of the UCT regime, will no longer apply. Under the ASIC Act, the protections for small businesses will apply if the upfront price payable is less than $5,000,000, and the other party meets the small business definition.
Standard Form Contracts
A standard form contract is a contract between two parties where one party cannot negotiate the terms. Importantly, from November 2023, a standard form contract will be presumed to be standard form unless proven otherwise. Generally, a standard form contract refers to a pre-written contract where:
- one party possesses the bargaining power;
- one party prepares the contract without discussion between the parties;
- the other party must accept or reject terms on a ‘take it or leave it basis’; or
- the other party does not have an effective opportunity to negotiate the contract terms.
Any negotiations between parties must be meaningful and not minor. Otherwise, a contract is likely to be considered standard form.
Recognisable examples of standard form contracts include:
- mobile phone plans;
- airline sales terms and conditions;
- gym memberships;
- information technology licenses; and
- online contracts where the party must tick an acceptance box to accept terms and conditions.
Factors of Unfair Contract Terms
The Australian Competition and Consumer Commission (ACCC) works to enforce the ACL. In addition, they provide plenty of guidance on examples of unfair contract terms.
An unfair term is one that:
- would cause a significant imbalance in the parties rights and obligations arising under the contract;
- is not reasonably necessary to protect the legitimate interests of the party benefiting from the term; and
- would cause detriment (financial or otherwise) to a party if applied or relied on.
Examples of Unfair Contract Terms
Let us explores examples of unfair contract terms in the table below.
| Example | Explanation | How to Avoid this Unfair Term |
| Unilateral Variation | Unilateral variation is where only one party can vary the contract. | Providers should give notice of any upcoming changes to the terms (particularly changes that would or could be detrimental to the customer). Customers must be able to terminate the contract without paying any additional fees. |
| Hair-Trigger Termination | Allowing one party to terminate for breach of the contract without extending this right to the other party. | Firstly, the contract should include grounds for termination. Secondly, both parties should have the opportunity to terminate for breach. Thirdly, the party in breach of the contract should have an opportunity to rectify the breach before the other party can terminate. |
| Early Termination Fees | Early termination fees will be unfair where they are excessive. | Termination fees should not penalise the customer or unjustly enrich the provider. These fees should be a genuine pre-estimate of the loss the provider believes they will suffer due to the customer’s early termination. They should also consider the costs the provider saves in not needing to provide the services after the early termination. |
| Automatic Renewal | Where the contract automatically renews: + before a party has a chance to opt out; + where the party has not been notified that the contract is renewing; + where the provider can change the cut-off date for the renewal; or + where the customer will incur expensive fees if they cancel after the contract has automatically renewed. | Where the contract automatically renews: + before a party has a chance to opt-out; + where the party has not been notified that the contract is renewing; + where the provider can change the cut-off date for the renewal; or + where the customer will incur expensive fees if they cancel after the contract has automatically renewed. |
| Limited Liability | Parties may not excessively limit their liability under the contract. | The contract should state that any limitation of liability does not limit a customer’s rights under the ACL. |
| Misleading Statements About Rights at Law | The contract should not include statements that mislead or confuse customers about their legal rights. | The ACL provides mandatory wording to include when expressing customers’ rights under the ACL, particularly where the provider provides warranties against defects. |
Key Takeaways
Whether you are a small business or a large business, it is vital to understand how the unfair contract terms regime works. This is especially important as the regime will capture more businesses from November 2023. Additionally, larger companies dealing with small businesses need to know what contract terms are permissible and what are at risk of being viewed as unfair.
If you need assistance with meeting the new legal requirements or negotiating fairer terms in a contract, contact our experienced contract lawyers 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.
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