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By Geeti Chawla, Principal at Matthews Folbigg in the Commercial Law Group

Effective 10 November 2023, certain changes to the unfair contract terms (“UCT”) regime pursuant to Schedule 2 of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (“Amendments”) will come into effect. Following these Amendments, a small business or a consumer entering into or renewing a contract, which falls within the meaning of a ‘standard form contract’ under the Australian Consumer Law (“ACL”), are expected to be afforded better protection against unfair contract terms. The Explanatory Memorandum clarifies that the Amendments have been introduced to reduce the prevalence of unfair contract terms and to prohibit the use of and reliance on unfair contract terms in standard form contracts.

Standard Form Contracts

The current definition of ‘standard form contracts’ under the ACL is generally limited to circumstances where consumers or small business are offered contracts on a ‘take it or leave it’ basis without any opportunity to negotiate the terms of such contracts.

However, under the Amendments, the definition of ‘standard form contract’ is expected to extend to include circumstances where there maybe actual or the potential for negotiations between the parties.

The Amendments may see certain contracts as a ‘standard form contract’ where a party:

  1. may negotiate contract terms that are minor or insubstantial in effect;
  2. may choose a term from a range of options offered by the other party;
  3. to another contract (or proposed contract) may negotiate terms of the other contract (or proposed contract).

Further, in determining if a contract is a ‘standard form contract’ the courts may consider if the party, in its previous dealings, has used the same or similar contract.

Small Business Contracts

‘Small Business Contracts’ were introduced to the ACL pursuant to the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 in 2016, following which ‘small business contracts’ were extended the unfair contract terms protection under the ACL.

The recent Amendments are set to widen the scope for businesses with ‘small business contracts’ qualifying for the unfair contract terms protection. An overview of the changes under the Amendments in comparison with the current laws are outlined below:

Current Law Amendments
Only applicable to businesses with:

  • with fewer than 20 employees; and
  • the upfront cost payable under the contract is less than $300,000; or
  • the contract has a duration of more than 12 months and the upfront costs under the contract do not exceed $1,000,000
 Applicable to businesses:

  • fewer than 100 employees; or
  • a turnover for the last income year of less than $10,000,000.

 

Better protection

The Amendments also broaden the scope of courts to make orders to void or vary the entire contract in an effort to protect parties from incurring losses or damage which it would likely incur under such a contract.

In doing so, the courts may also prevent a party from:

  1. relying on or applying any term (same or similar) in any existing contract which the court has found to be unfair; and/or
  2. entering into any future contract with the same or similar term which the court finds is unfair.

In addition, on application by a regulator such as the Australian Competition and Consumer Commission (ACCC), courts can prevent a term that is the same or similar in effect to an unfair contract term from being included in any standard form contract.

Increased Penalties

A significant change to the UCT regime under the Amendments is the introduction of increased penalties for proposing, applying, relying on or merely purporting to propose, apply or rely on an unfair contract terms under the ACL.

Previously, the ACL did not impose penalties on suppliers or manufacturers for entering into a standard form contract with unfair contract terms or seeking to rely on them. While such supplier or manufacturers could likely be ordered to pay damages for losses incurred by the other party as a result of any unfair contract terms, the practice of entering into a standard form contract with unfair contract terms was not regulated or penalized prior to the Amendments.

Under the Amendments, the onus is on suppliers and manufacturers to ensure their standard form contracts are free of unfair contract terms.

A corporation found to be in contravention of the ACL under the new UCT regime pursuant to the Amendments will be faced with maximum financial penalties of the higher of:

  • $50 million;
  • three times the value of the “reasonably attributable” benefit obtained from the conduct, if the court so determines; or
  • if a court cannot determine the benefit, 30% of the adjusted turnover during the breach period.

For Individuals, the maximum penalty will increase from $500,000 to $2.5 million.

Conclusion

As the Amendments are set to commence in less than six months, it is prudent for contracting parties to review the terms of their current and upcoming standard form contracts prior to November 2023.  The increased penalties and extended scope of the ACL pursuant to the Amendments are intended to more strictly regulate the use of unfair contract terms in an attempt to restore the power imbalance.

Our team of Commercial lawyers can assist you in reviewing your standard form contracts and small business contracts in light of the Amendments and offer personalised advice on any potential implications for you as an individual or a business. Call us on 9635 7966 for friendly discussion or click here to get in touch.