Unfair Contract Terms – Reforms Coming Soon

From 9th November 2023, changes to the Australian Consumer Law will prohibit businesses from proposing, using, or relying on unfair contract terms in standard form contracts with consumers and small businesses.

It’s imperative that businesses review their standard form contracts and amend them if applicable, in order to avoid the heavy penalties coming into effect.

What is a Standard Form Contract?

A pre-written contract provided by a business to a customer where the customer can’t change any (or the majority of) the terms of the contract. Standard form contracts are often described as “take it or leave it.”

Standard form contracts typically provide a cost-effective way for many businesses to contract with large volumes of customers and are common in industries such as; gyms, car rental companies or building and construction.

What are Unfair Contract Terms?

As per the ACCC website, contract terms are unfair if they:

  • cause a significant imbalance in the rights and obligations of the parties under the contract

  • are not reasonably necessary to protect the legitimate interests of the party who gets an advantage from the term, and

  • would cause financial or other harm to the other party if enforced.

In deciding whether a term is unfair, a court can consider any matters it thinks relevant but it must consider the contract as a whole and whether the term is transparent.

The law sets out examples of terms that may be unfair, including:

  • terms that allow one party (but not the other) to avoid or limit their responsibilities under the contract

  • terms that allow one party (but not the other) to end the contract

  • terms that penalise one party (but not the other) for breaching or ending the contract

  • terms that allow one party (but not the other) to change the terms of the contract.

What are the Changes Coming into Effect?

  • There will be better protection for consumers and small businesses who have previously had limited bargaining power, expertise, and ability to negotiate or assess standard form contracts which are often drafted in favour of the party offering them.

  • The coverage of the unfair contract term laws will expand to apply to more small business contracts than before.

  • The threshold for small business contracts will increase to apply to small business that employ fewer than 100 persons or have an annual turnover of less than $10 million.

  • The contract value threshold will be removed

  •  More clearly defined definition of ‘standard form contracts’.

  • Courts will be able to impose substantial penalties on businesses and individuals who include unfair terms in their standard form contracts.

  • The maximum financial penalties for businesses under the new unfair contract terms law are the greatest of:

+ $50,000,000;

+ three times the value of the “reasonably attributable” benefit obtained from the conduct, if the court can determine this; or

+ if a court cannot determine the benefit, 30 per cent of adjusted turnover during the breach period.

The maximum penalty for an individual is $2.5 million.

The changes will apply to:

  • Standard form contracts made or renewed on or after 9 November 2023.

  • A term of a contract that is varied or added on or after 9 November 2023.

However, where a term of a contract is varied or added on or after 9 November 2023, the changes relevant to deciding whether a contract is a standard form contract apply to the whole contract.

For more information about the changes to the unfair contract term laws, head to the ACCC’s website here.

At Litton Legal, we can assist with any Commercial Contracts. Contact our friendly office on hello@littonlegal.com.au