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Are you ready for changes to Australia’s unfair contract terms regime?

Andrew Parlour and Rory Maguire

From 9 November 2023, Australia’s unfair contract terms regime is changing. The changes include expanding the unfair contract terms regime to ‘small businesses’ that have fewer than 100 employees OR turnover of less than $10m. New civil penalty provisions for non-compliance will also apply.

Given the importance of these changes and the potential penalties involved, businesses who deal with ‘standard form’ contracts (which can include terms and conditions of trade) should ensure they are both familiar and compliant with these changes so as not to be caught off guard.

Background

The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Amending Act) received Royal Assent on 9 November 2022 and will take effect from 9 November 2023.

The Amending Act seeks to enhance the regulation of unfair terms in standard form contracts by strengthening and clarifying the existing unfair contract term provisions and reducing their prevalence in both consumer and small business standard form contract.

The amendments include substantial changes to the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (ASIC Act) which both regulate unfair contract terms, including:

  • the introduction of new unfair contract term prohibitions;
  • creating new civil penalty provisions for breaches of the unfair contract term regime;
  • clarifying and expanding the powers of a court to make orders to void, vary or refuse to enforce part or all of a contract;
  • clarifying a court’s power to issue injunctions in relation to unfair contract terms; and
  • extending the application of the unfair contract terms regime to a greater number of small business contracts.

The changes will have a significant impact on businesses that routinely work with consumers and small to medium business, as well as those which rely on standard form contracts.

What contracts are affected by the changes?

The changes extend the prohibitions on unfair contract terms to a larger number of contracts by altering and expanding the definition of “small business”.

Until 9 November 2023, the unfair contract terms regime applies to small business contracts where one of the parties to a contract is a business that employs fewer than 20 employees, and the upfront contract value threshold is below $300,000 (or below $1 million for contracts exceeding 12 months).

From 9 November 2023, a contract under the Australian Consumer Law will now be considered a ‘small business contract’ where a party to the contract:

  • is a business that employs fewer than 100 employees, including part-time employees (to be counted as an appropriate fraction of a full-time employee) and excluding casual employees (unless employed on a regular and systematic basis); and/or
  • is a business that has a turnover for the preceding income year of less than $10 million.

There will no longer be any value thresholds that apply to small business contracts covered under the Australian Consumer Law.

Under the ASIC Act for contracts involving financial products or services, a contract is only a small business contract if the upfront price payable is less than $5 million, otherwise no threshold applies.

Given these changes, the unfair contract laws will now apply to a much larger pool of consumers/businesses than before.

Changes to what is considered a standard form contract

Unfair contract terms often arise in the context of standard form contracts, that is, a contract that an organisation uses for all of its business without amendment. The Amending Act also clarifies factors taken into account in determining whether a contract is a standard form contract.

Repeat usage of a given contract is now a further factor relevant to deciding whether a contract is a standard form contract, and on the other hand, the following factors must be disregarded in determining whether a party was given an effective opportunity to negotiate the contract (that is, whether the contract was proposed on a “take it or leave it” basis):

  • whether the party had an opportunity to negotiate changes, to terms of the contract, that are minor or insubstantial in effect;
  • whether the party had opportunity to select a term from a range of options determined by another party; or
  • the extent to which a party to another contract or proposed contract was given an opportunity to negotiate terms of the other contract or proposed contract.

Consequences for failing to comply

Prohibitions and penalties

Parties will now be prohibited from proposing, using or relying on unfair terms in a standard form contract. A prohibition can be contravened multiple times within the same contract and in relation to the same term.

Courts will now have the power to impose a civil (monetary) penalty on the party that is responsible for proposing, applying or relying on a standard form contract term that it determines is unfair under the Australian Consumer Law.

  • For a body corporate, the maximum penalty for breaches of the unfair contract term provisions will be the greater of:
    • $50 million;
    • three times the benefit obtained by the body corporate either directly or indirectly which is reasonably attributable to the conduct, provided the court can determine the value of this; or
    • 30% of the body corporate’s adjusted turnover during the breach period.
  • For an individual, the maximum penalty is $2.5 million.
Remedies

Previously, if courts found a term to be unfair, the term was automatically void. The Amending Act now introduces additional remedies, granting the courts greater discretion in determining appropriate remedies for example:

  • orders to void, vary or refuse to enforce part or all of the contract to prevent loss or damage.
  • orders preventing a term that is the same or substantially similar to a declared unfair term, from being included in any future standard form contracts.
  • issuing injunctions against a party from:
    • entering into any future contracts that contain a term that is the same or similar in effect to the unfair term; or
    • applying or relying on a term in an existing contract that is the same or similar in effect to the unfair term.

What's next?

In preparation for 9 November 2023, it is imperative that you consider whether your business uses standard form contracts which may contain unfair contract terms. Where unfair contract terms are present, or if you are unsure whether a term is unfair, now is a good time to get advice and update the contracts before the changes take effect.

If you would like any assistance preparing for these changes or you are uncertain about how the changes will impact you or your business, contact our Corporate & Commercial Advisory team.

If you would like to keep up to date with Russell Kennedy Alerts, Insights and upcoming events, you can subscribe to our mailing list here.

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