Whilst unfair contract terms included in consumer or small business standard form contracts could be declared by a Court to be void and unenforceable, Courts have historically been unable to impose penalties under the provisions of the Australian Consumer Law (ACL) on businesses that include them in their consumer or small business standard form contracts.
This will all change when the relevant provisions of the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022, which enable a Court, under the provisions of the ALC, to impose penalties for the inclusion of unfair contract terms into consumer or small business standard form contracts, comes into effect on 9 November 2023. This leaves you with less than 12 months’ grace period to review and make any changes to your consumer and small business standard form contracts.
Why has this law reform occurred?
The changes have come about to protect consumers and small businesses who may be unable to properly negotiate terms included in standard form contracts proposed by businesses due to an imbalance in bargaining power.
The ability of the Court to impose pecuniary penalties provides a stronger deterrent to businesses from including unfair terms in their consumer and small business standard form contracts.
Which contracts are affected?
The strengthened unfair contract terms regime under the ACL applies to certain standard form contracts involving:
- Consumers – being an individual who acquires the goods or services wholly or predominantly for personal, domestic or household use or consumption; or
- Small businesses – where at least one party to the contract is a business that employs fewer than 100 people or has a turnover of less than $10m for the previous income year.
In determining whether a contract is a standard form contract under the strengthened regime, a Court may take into account such matters as it thinks relevant, but must take into account the following:
- whether one of the parties has all or most of the bargaining power;
- whether one of the parties has made another contract, in the same or substantially similar terms, prepared by that party, and, if so, how many such contracts that party has made;
- whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
- whether another party was, in effect, required either to accept or reject the terms of the contract;
- whether another party was given an effective opportunity to negotiate the terms of the contract;
- whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.
It is also important to note that under the strengthened regime, a contract may be determined to be a standard form contract despite the existence of one or more of the following:
- an opportunity for a party to negotiate changes to terms of the contract, that are minor or insubstantial in effect;
- an opportunity for a party to select a term from a range of options determined by another party;
- an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.
What is an unfair contract term?
A term of a consumer contract or small business contract is unfair if all of the following are satisfied:
- 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 (whether financial or otherwise) to a party if it were to be applied or relied on.
In determining whether a term of a contract is unfair, a court may take into account such matters as it thinks relevant, but must take into account the extent to which the term is transparent (for example, how clearly and predominantly it is presented and the language used), and the contract as a whole.
The ACL contains examples of the kinds of terms of a consumer contract or small business contract that may be unfair, including:
- a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
- a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
- a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
- a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
- a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
- a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
- a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
- a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
- a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
- a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
- a term that limits, or has the effect of limiting, one party’s right to sue another party;
- a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
- a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract;
- a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.
What are the penalties?
The maximum pecuniary penalties that will be able to be ordered once the new provisions come into effect are the greater of:
- $50,000,000;
- if the court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, have obtained directly or indirectly and that is reasonably attributable to the act or omission–3 times the value of that benefit;
- if the court cannot determine the value of that benefit–30% of the body corporate’s adjusted turnover during the breach turnover period for the act or omission.
It is also important to note that a person who contravenes the relevant section of the ACL commits a separate contravention of that subsection in respect of each term that is unfair and that the person proposed.
Will penalties be able to be ordered in relation to contracts already in effect on the commencement date?
The penalties will be able to be imposed in relation to standard form contracts involving consumers or small businesses which are entered into or renewed after 9 November 2023 or to terms within contracts that are varied after that date.
What can you do now to minimise your risk?
You can use this grace period to review your contracts and make any changes where appropriate.
For assistance with reviewing and revising your standard form contracts, contact us.
Information contained within this blog post is intended to be general information only and is not in any way intended to constitute legal advice. You should not act or rely on any information found in this blog post without obtaining prior advice specific to your circumstances.
