Unfair Contract Terms: Expanded application to more businesses - JHK Legal Commercial Lawyers

6 June 2022

Unfair Contract Terms: Expanded application to more businesses

Written by: Rod Lindquist

The Australian Consumer Law protects small businesses from unfair terms in standard form contracts entered into after 12 November 2016.

The protection relates to standard form contracts in the following circumstances;

  • The upfront price payable in the contract is no more than $300K or $1M if the if the contract is for more than 12 months.
  • One or more of the parties is a small business (employs less than 20 people)
  • Is for the supply of goods or services or the sale or grant of an interest in land.

The protection also applies to variations of standard form contracts from 16 November 2016

In brief, a standard form contract is one that has been prepared by one party to the contract and it is put to the other party on a “take it or leave it basis”, such that the other party has little or no opportunity to negotiate the terms.

The Law sets out examples of terms that may be unfair such as;

  • Terms that enable one party solely to avoid or limit their obligations .
  • Terms that enable one party solely to terminate.
  • Terms that enable one party solely to vary the terms .
  • Terms that penalise one party solely for breaching or terminating.

In essence to be unfair, a term must cause significant imbalance between the parties, or not be reasonably necessary to protect the legitimate interests of the party advantaged by the term, or cause detriment to a small business if it were applied or relied upon.

Only a Court can decide if a term is unfair. In that event the term will not be binding. The balance of the contract may continue to bind the parties to the extent it is capable of such in the absence of the unfair term.

The Law does not apply to terms that set the price, or define the main subject matter, or are expressly permitted by a State, Territory or Federal Law, or have been negotiated.

In addition, some contracts are excluded;

  • Shipping Contracts.
  • Constitutions of Companies, managed investment schemes or other kinds of bodies.
  • Contracts in sectors exempted by the Minister – None to date.

Proposed Changes all businesses need to consider.

On 9 February 2022 legislation was introduced following a review in 2018 and public consultation  until  September 2021. It was anticipated to become law 12 months after it received Royal Assent.

The bill lapsed on 11 April 2022 due to the calling of the election. It is likely to proceed in the next Parliamentary Session.

The definition of small business has been expanded to include parties, which;

  • Employ less than 100 people; or
  • Had less than $10M in annual turnover in the previous year.

There is no longer a value threshold, so it will apply to all small business contracts.

It will be illegal to;

  • Propose an unfair term in a standard form consumer or small business contract; or
  • Apply or rely (or purport to do so) on an unfair term in a consumer or small business contract.

Pecuniary penalties have been introduced, in addition to the current power to declare a term unfair.

For individuals a penalty up to $500K can be imposed.

For Corporations, the greater of;

  • $10M; or
  • Three times the value of the benefit received; or
  • 10% of annual turnover in preceding 12 months, if the court cannot determine benefit obtained by the offence.

In addition, a court can;

  • Void, vary or refuse to enforce part, or all of a contract;
  • Make orders injuncting persons from entering into any future contract that contains a term that is the same or similar in effect.
  • Issue public warning notices and make orders disqualifying a person from managing a corporation.

The proposed legislation provides further clarity as to the definition of what is a standard term contract by setting out the matters that a court must take into account, including;

  • Whether the party has entered into a contract that is substantially similar to another contract entered into by that person and the number of times.
  • In determining whether a party was able to genuinely negotiate a contract the court is to disregard instances where:
  • There were minor or insubstantial changes to the contract.
  • An option to select a pre-determined range of terms.
  • Opportunity has been given to negotiate on another similar contract.

Having regard to the effect of standard contracts being unlawful, along with the prospect of substantial monetary penalties all businesses should review all standard contracts for removal of unfair contract terms.