Under the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth) new changes to unfair contracts are being implemented from 9 November 2023.
These changes will dramatically impact businesses who use a standard form contract or standard terms and conditions in the course of their business.
What contracts do the changes apply to?
The changes being made under this legislation are in relation to standard form contracts made or renewed on or after 9 November 2023. Additionally, if a term of a contract is varied or added on or after 9 November 2023, the new legislation may apply to the standard form contract as a whole.
Due to the nature of these contracts, they can involve unfair contract terms that cannot be negotiated by parties. Contract terms are ultimately deemed to be unfair if these three conditions are satisfied:
- The contract term creates a significant imbalance between the parties in relation to their rights and obligations;
- The term is not reasonably necessary under the contract to protect the legitimate interests of the party with the advantage; and
- The contract term would cause detriment (whether that be financial or otherwise) to the disadvantaged party if it were successfully applied or relied on.
If a contract term is found unfair and is in a standard form contract, then under this new legislation penalties will apply.
What are the changes?
From the 9 November 2023 the following changes will be implemented to standard form contracts:
- From this date, proposing, using or relying on unfair contract terms in standard form contracts will be banned and penalties will apply;
- A court (in addition to existing factors) will consider whether the party that prepared the contract has made other contracts that are the same or very similar as well as the number of times this has occurred; and
- Changes will also make it clear that a contract may be deemed as a standard form contract despite any of the following:
- The other party had the opportunity to negotiate the contract but only made minor or insubstantial changes;
- The other party could select a term from a range of options determined by the party that prepared the contract; or
- The party that prepared the contract let a third party negotiate the terms. As a result of this, even if some consumers or small businesses are able to negotiate the terms of a contract that is issued to a broader group of consumers or small businesses, the contract may still be a standard form contract.
In addition to the above, changes are also being made to the definition of a small business and this impacts who is protected from unfair terms in standard form contracts. Small businesses alongside consumers are protected from unfair contract terms, however this legislation introduces new thresholds to determine what constitutes a small business. As such, small businesses will be protected from unfair contract terms in any new or varied standard form contracts from 9 November 2023, if they have 100 or fewer employees, or they make less than $10 million in annual turnover.
Further to this, specific changes have been made relating to small businesses under the Australian Securities and investments Commission Act 2001 (‘ASIC Act’). As such for contracts for which the ASIC Act applies, the financial threshold for a small business has been increased from a value of $3 million in contracts to an upfront value of $5 million.
What penalties apply?
Currently no pecuniary penalties exist if a contractual term is voided because it is unfair in a standard form contract.
Under this new legislation, there will be substantial pecuniary penalties for a person who proposes, applies, or relies on an unfair term.
The maximum penalty for this for companies will be the greater of $50 million, 3 times the value of the benefit of the unfair term, or 30% of the adjusted turnover during the breach turnover period (if a court cannot determine the value of the benefit). For individuals, the max penalty is $2.5 million.
As to the contract itself, in addition to the court being able to find unfair terms void, they can also void the entire contract, vary the contract to remove the unfair term or refuse to enforce the unfair term.
The court may also issue an injunction restraining a person from entering into any future contract that contains a term that is the same or similar in effect to a term that has been declared an unfair contract terms or applying, or relying on, a term in any existing contract that has the same or similar in effect to a term that has been declared unfair, whether or not that contract is before the court.
It is essential that as a business you review your standard term contract to see if they contain unfair contract terms as the penalties for breaching this legislation are quite severe.
It is also worth noting that the Australian Competition and Consumer Commission has indicated that in 2023-24 it will prioritise enforcing these changes.
The information in this article is general in nature and does not constitute professional advice.