Businesses who use standard form contracts should actively take steps to review whether they are compliant with the updated unfair contract terms regime. A standard form contract exists where its terms and conditions are set unilaterally by the drafting party, and there is little scope for negotiation by the consumer or small business.
On 9 November 2022, the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (the Bill) came into force to introduce changes to the Consumer and Competition Act 2010 (Cth) (CCA) and the Australian Securities and Investments Commission Act 2001 (Cth).
What makes it unfair?
A standard form contract term will be considered unfair by a court if:
- it causes a significant imbalance in the parties’ rights and obligations under the contract;
- it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause financial or other detriment to a party if it were to be applied or relied on.
Deciding factors (among others) in determining whether a term is unfair are how transparent the term is, as well as the overall rights and obligations of each party under the contract.i
What are the changes?
Unfair Contract Terms (UCT)
Businesses will no longer be permitted to rely on UCT in standard form consumer and small business contracts. The Bill makes changes to the existing unfair contract terms regime by:
- Making UCTs unlawful. Previously, where a contract term is found to be “unfair” that clause is simply void. A party who proves to the court that they have suffered loss or damage as a result of the unfair term could be compensated, however, no penalty was available for including or relying on an unfair contract term. The Bill changes this position, introducing civil penalties for breaches of the UCT provisions.
- Expanding the definitions of a “small business contract” and “standard form contract”:
- a “small business contract” now relates to businesses with fewer than 100 employees (previously 20 employees) or a turnover less than $10 million, regardless of contract value; and
- a contract can still be considered a “standard form contract” even if it provides the other party with an opportunity to negotiate minor or insignificant changes, to choose a term from a range of options specified by the other party.
- Courts will have greater powers. The power of courts has expanded to impose civil penalties and make more flexible orders to prevent or reduce loss or damage in relation to the UCT.
Competition and Consumer Law
The maximum penalties that may be awarded against corporations and individuals for breaches of the UCT provisions of the CCA and the Australian Consumer Law, to apply to conduct occurring from 10 November 2022:
|Current Penalty||New Penalty|
|Corporations||The greatest of: $10 million,3 x the value of the benefit from the breach, or10% of annual turnover in the 12 months before the breach.||The greatest of: $50 million,3 x the value of the benefit from the breach, or30% of adjusted turnover during the breach period (maximum 12 months)|
Why is this important?
The introduction of penalties raises the risk to businesses who use standard form contracts, as it will preclude these businesses from including terms that are “in the grey” regarding UCT.
It is anticipated that given the significance of these changes, ASIC and the ACCC will be closely monitoring the use of standard form contracts for non-compliance with UCT provisions, which will increase the likelihood of enforcement proceedings for those in breach.
What should businesses do?
The reforms will come into effect 10 November 2023, 12 months from Royal Assent of the Bill, and so during this grace period, businesses should:
- review their standard client service agreements for small businesses and consumers, to ensure they continue to be compliant and avoid harsher penalties;
- take steps to reassess all commercial partners and clients to identify who may fall within the expanded definition of “small business” as mentioned above; and
- assess their contract development and management processes to allow for proper management of these changes across all relevant stakeholders in the business.
If you need assistance reviewing your standard form contracts in light of these changes, or more generally, please reach out to us at Source Legal.
This information is general in nature and is not intended to address the circumstances of any particular individual or entity. We endeavour to provide accurate and timely information however, we do not guarantee that this update is accurate at the date it is received or that it will be accurate in the future.
Current as of 17 November 2022.
For more information, please contact Kate Young, Legal Counsel – Commercial, Source Legal email@example.com
iFor further information on unfair contract terms: https://www.accc.gov.au/business/selling-products-and-services/contracts/determining-whether-a-contract-term-is-unfair.