On 10 November 2020, the Federal Government announced changes to the unfair contract term provisions in the Australian Consumer Law, which now make unfair contract terms illegal and punishable by civil penalties. Further changes have also been proposed in relation to expanding the threshold of the term ‘small business’ and the definition of a ‘standard form contract’.
These amendments will greatly expand the reach of the Unfair Contract Term Laws and enable more small businesses to rely upon these protections.
What makes a contract term ‘unfair’?
The unfair contract term regime protects consumers and small businesses that are party to ‘standard form contracts’. A term of a standard form consumer or small business contract is unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract,
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, and
- it would cause detriment, financial or otherwise, to a party if it were to be applied or relied upon.
Examples of unfair contract terms include clauses that allow one party (but not the other) to:
- terminate the contract,
- vary the terms of the contract,
- renew or not renew the contract,
- determine whether there has been a breach of the contract,
- avoid or limit liability for negligence, or
- limit the other party’s right to sue under the contract.
The proposed amendments
1. The Unfair Contract Term
Under the current law, contract terms are automatically void (or invalid) if the Court determines that the term is unfair with no civil penalties being applied. Under the planned changes, these terms will be considered unlawful and Courts will be given broader flexibility to determine what remedy is appropriate, including imposing civil penalties.
2. The ‘Small Business’ threshold
Under the current definition, the protections only apply to a small business contract where at least one party is a business that employs less than 20 people and the upfront price payable under the contract is below certain monetary thresholds, being $300,000.00 for a contract of less than one year’s duration and $1 million for a contract that is one year or long in duration.
Under the planned changes, the ‘small business contract’ threshold is to apply to those with an annual turnover of less than $10 million or fewer than 100 employees, with no upfront price requirements.
3. The ‘Standard Form Contract’
Under the current law, there is little guidance as to what a standard form contract involves, however the proposed changes direct the Courts to a series of factors that must be considered when deciding if a contract is in standard form.
Such factors include whether a party has an ‘effective opportunity to negotiate the terms of the contract’ and whether there is ‘repeat usage’ of a contract template. The proof of unfairness of a contract term will also change, with the introduction of a rebuttable presumption that a term is unfair, if in a separate case, the same or substantially similar term was used by the same entity or in the same industry and was found to be unfair.
What does your business need to do to get ready for these changes?
Although there has been no set date as to when these amendments will take effect, we suggest that businesses who use standard form contracts consider whether their business is now captured by the expanded definitions.
Further, business should review their existing and template standard form contracts to ensure that there are no unfair contract terms, as there will soon be a large range of penalties for using such terms and such clauses will be at risk of being void at law.
How can Sharrock Pitman Legal assist?
If you would like further information in relation to these proposed changes, or if you would like to seek advice on a contract you have used or have entered into, please contact our Commercial Law team on 1300 205 506 and we will be happy to assist.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
Liability limited by a scheme approved under Professional Standards Legislation.
Mitchell is the Managing Principal of our law practice.
He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.