The Australian Consumer Law in the Competition and Consumer Act 2010 (Cth) protects consumers and certain small businesses from unfair contract terms in standard form contracts. Under the current laws, unfair contract terms in certain types of standard form contracts are deemed void (not operative), with the remainder of the contract still binding if the contract can operate without the unfair terms.
On 9 November 2023, changes to this existing regime will come into effect, including the introduction of financial penalties. The changes will apply to any new standard form contracts made or renewed from 9 November 2023 or any contract terms varied or added to a standard form contract after that date.
What is a “standard form contract” and “unfair contract term”?
A standard form contract is typically one that is prepared by one party to the contract; is not negotiated between the parties; and contains the same terms for all transactions of that type. Online agreements or terms and conditions presented to consumers or small businesses in clickwrap form (for example, where the consumer ticks a box to accept) is a common example of a standard form contract.
The unfair contract terms laws currently apply to standard form contracts between a business and a consumer, provided that the contract relates to goods or services supplied for private or domestic purposes; and to standard form contracts between two businesses.
In the case of standard form contracts between two businesses, the laws currently only apply if one of the businesses is a “small business” having fewer than 20 employees and the upfront contract value does not exceed $300,000 (or $1,000,000 if the contract is for a period of 12 months or more).
A contract term may be considered unfair if it:
- would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Some examples of contract terms that may be deemed unfair include:
- unilateral variation terms;
- automatic renewal terms;
- unreasonable termination terms;
- terms allowing one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
- terms which permit one party to assign (transfer) the contract without the other party’s consent;
- terms which limit the other party’s capacity to sue; and
- excessive termination fees.
What are the key changes?
A. New financial penalties and court powers introduced
The new changes will explicitly prohibit the use, application of, or reliance on unfair contract terms in a standard form consumer or small business contract. The courts will also be given the power to impose a financial penalty as a remedy for breach of this prohibition, in addition to the current ability of the courts to declare and void relevant terms as unfair.
Maximum penalties for companies that breach those provisions are the greater of $50 million and three times the value derived from the relevant breach, or, if the value derived from the breach cannot be determined, 30% of the company’s turnover during the period it engaged in the conduct.
The penalties are intentionally severe, with the ACCC stating, “These maximum penalty changes will allow the Courts to ensure that the penalties imposed for competition and consumer law breaches are not seen as a cost of doing business but rather as a significant impost and something likely to raise the serious attention of owners or shareholders.”
In addition to introducing the prohibition and penalties, the courts have also been given the power to issue injunctions in respect of existing or future consumer or small business standard form contracts that contain a term that is the same or is substantially the same as a term of a contract between the parties that the court has already declared to be an unfair contract term.
B. More guidance is provided to determine whether a contract is a standard form contract
If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise.
At present, to determine whether a contract is a standard form contract, 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 relating to the transaction;
- 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 in the form in which they were presented;
- 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; and
- any other matter prescribed by applicable regulations.
The new changes introduce additional matters the court can consider when determining whether a contract is a standard form contract. The court will be able to take into account whether a party has entered into another contract in the same or substantially similar terms and how many such contracts that party has made. In addition, a contract may be determined to be a standard form contract even where a party has had the opportunity to negotiate terms to the contract that are minor or insubstantial in effect or has had the opportunity to select a term from a range of predetermined options in the contract. A court may also determine a contract is a standard form contract even if the parties to that contract have had the opportunity to negotiate the terms of another contract or proposed contract.
C More small businesses are afforded protection
The new changes will also expand coverage of the unfair contract terms laws to cover more small businesses. The laws will now apply to standard form contracts with small businesses that have fewer than 100 employees or have an annual turnover of less than $10 million, and will apply irrespective of the value of the contract.
More standard form contracts are now likely to be captured by the unfair contract terms laws as a result of this broadening of the definition of “small business” and removal of the threshold on contract value.
Do these changes affect you?
If you commonly issue standard form contracts to your customers, then now would be a good time to take a look at your contracts and consider if any of your standard contract terms may fall afoul of the prohibitions on unfair contract terms and put your business at risk of potential financial or other penalties moving forward. If so, you may be able to make some changes to your standard form contracts to address this potential risk.
If you have any concerns or questions about your standard form contracts, then feel free to reach out to us and we will be happy to help.
Note that this article is not intended to provide legal advice or offer comprehensive guidance.