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Unfair Contract Term Reforms Are Coming: Will Your Business Be Ready?

  • 18 May 2024
  • Studio Legal

Written by Claire Smithson and Principal, Jennifer Tutty.

As of 9 November 2023, the unfair contract terms regime will change in Australia. This change will apply to all standard form consumer contracts and small business contracts entered into or renewed/varied from 9 November 2023.

For businesses relying on contracts to operate many facets of their business, it definitely feels a little Game of Thrones, where ‘winter is coming’.

With the deadline only four months away, all businesses should have their standard form contracts reviewed to ensure compliance with the changes and to avoid the increased penalties for non-compliance.  To help, we’ve prepared a summary of things you need to know about the regime, and how to get prepared on time.

What is a standard form contract ?

Traditionally, a standard form contract is a contract that has been prepared by one party to the contract and is not subject to negotiation between the parties. These types of contracts are generally used as a cost-effective option for many small businesses. 

Everyday examples can be seen in:

– Gym membership applications; 

– Software licences;

– Leases; or 

– Services agreements. 

Pursuant to Section 27(2) of the Australian Consumer Law (ACL), in determining 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; 

– The contract was prepared by one party before any discussion relating to the transaction  occurred between the parties; 

– Another party was, in effect, required either to accept or reject the terms of the contract; 

– Another party was given an effective opportunity to negotiate the terms of the contract; 

– The terms of the contract (take into account the specific characteristics of another party or the particular transaction). 

The application of this section has been reformed – more on that below. 

What is an unfair contract term?

The ACL provides that, a term is deemed to be unfair if the following three limbs of unfairness are proven:

  1. The term creates a significant imbalance in the parties’ rights and obligations arising under the contract; 
  1. The term is not reasonably necessary to protect the legitimate interest of the party who would be advantaged by the terms; and 
  1. The term would cause detriment to a party if applied or relied on. 

An example of an unfair contract term may be a term that imposes automatic renewal of the contract on one party, a term that allows one party (but not another party) to vary the terms of the contract or a term giving one party the right to terminate the contract early but not the other. 

Why the changes?

When the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Act) comes into force on 9 November 2023 it will trigger several reforms for many Australian businesses in relation to both the Australian Consumer Law and Australian Securities and Investments Commissions unfair contract terms regime. 

The purpose of the reformed Act is to provide greater protection for parties such as consumers and small businesses, who often lack the ability and bargaining power to negotiate terms of a contract. 

The changes deem the inclusion of unfair terms as unlawful, rather than void, and will impose monetary penalties.

Prior to these amendments, unfair terms within a standard form contract were found to be void by the Courts. However, this approach has not provided sufficient protections nor deterrence against unfair terms. 

What are the key changes?

Here is a summary of the key changes that will come into effect on 9 November 2023. 

– Increased Penalties for non-compliance being up to $2,500,000.00 for individuals and the greater of $50million, three time the benefit obtained or 30% of the corporations adjusted turnover during the breach for a Corporation. 

– Unfair Contract Terms are now unlawful, not just void and unenforceable. This means your contracts cannot contain these clauses. 

– Changes to who the regime applies to (the new definition of small business detailed below). 

– Greater powers given to the Courts to restrain a party from applying or relying on a term than has been deemed unfair. 

– Clarity to the court when determining whether a contract is a standard form contract. In addition to considering the above factors, the court is now to disregard where a party has negotiated minor changes or insubstantial changes, a party’s ability to select from a range of pre-determined terms, that a party to another similar contract was given the opportunity to negotiate the terms of the contract. 

The Court will also consider how often a party uses the contract. If a party uses the same contract, with the same terms, it is likely that the court will find the contact to be a standard form contract. It is important to note that there is a presumption that a contract is a standard form contract. If the matter was heard before a court, the  the party that prepared the contract has to prove that contract is not a standard form contract.  

Who does this apply to?

The reforms impact Australian Businesses and consumers that use standard form contracts for the supply of goods/service, sell or lease land and the supply of financial services of financial products. 

Where you use a standard form contract and either party meet the following criteria, you will need to have your contracts reviewed to ensure they are compliant:

– You employ less than 100 people; or 

– You have a turnover of less than $10million for the last financial year. 

Your next steps

If you are using a standard form contract, we recommend that you contact us to ensure that all your contracts are compliant under the new regime. We will assist you in determining whether these changes apply to you and review any contracts that may be impacted by these reforms. 

Further Information

If you are looking for legal assistance updating your contracts to ensure compliance with the upcoming changes to the Unfair Contract Terms Regime, please contact John Snow, I mean us (sorry -yes we understand are getting a little carried away with our GOT references), through our online form or via email at hello@studiolegal.com.au.

Written by Claire Smithson and Principal, Jennifer Tutty.

Published 24 July 2023.

Photo by Arisa Chattasa on Unsplash

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The information in this article is of a general nature. It does not constitute formal legal advice and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.