How Changes to the Unfair Contract Terms are Going to Affect Your Small Business
12 Aug 2022
Constructive Legal Solutions is here to assist with reviewing your standard form contracts to ensure they do not contain unfair contract terms. Call 1300 972 092 or send your enquiry to admin@constructivelegalsolutions.com.au for tailored advice.
In 2021, the Federal Government proposed a number of changes to the unfair contract terms regime, specifically in relation to “small businesses”. The changes include:
- Making unfair contract terms illegal;
- Changing the definition of ‘Small Business’ and the thresholds requirements;
- Penalties for unfair contract terms;
- More clarity in relation to what constitutes a ‘standard form contract; under the Australian Consumer Law (ACL).
But what is an unfair contract term?
Although only an Australian Court can determine whether a contract term is unfair, it is good for you to understand the test they use, and this includes examining:
- Whether the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- If the term is not reasonably necessary to protect the legitimate interests of the party that would benefit from the term, or
- Whether it would cause detriment (financial or otherwise) to a small business if it were to be applied or relied on.
A. WHAT CONTRACTS ARE CURRENTLY AFFECTED?
Currently affected contracts are ones that:
- Have been entered, renewed or varied on or after 12 November 2016 (excluding shipping contracts, constitution of companies, managed investments schemes or other kinds of bodies and contracts in sectors exempted by the Minister [no sectors are currently exempted]); and
- Have at least one party considered a small business; and
- Are for the supply of goods or services, or the sale or grant of an interest in land; and
- Have an upfront price payable under the contract that is no more than $300,000 or $1,000,000 if the contract is for more than 12 months.
B. HOW DO THE PROPOSED CHANGES IMPACT AFFECTED CONTRACTS?
The proposed changes mean, more contracts may be affected by the unfair contract term regime due to the modified definition of small business and the increase in the threshold requirements to be classified a small business. Additionally, the requirement for there to be an upfront price payable will be removed.
It must be noted as well, there are some terms which cannot be found unfair. These include terms that:
- Define the main subject matter of the contract (i.e. terms that define the goods or services being acquired under the contract);
- Set the upfront price payable; and
- Are required or expressly permitted by Commonwealth, state or territory law (i.e. permitted under the Building Code or another prescribed industry code).
C. SO, WHAT ARE THE CHANGES?
Below we have outlined the changes under clear headings to help you navigate this new transition we envisage to be implemented in the near future.
| Topic | Current | Proposed Change |
| Small Business Definition | A. Fewer than 20 employees; AND
B. Have an upfront price payable under the contract that is no more than $300,000 or $1,000,000 if the contract is for more than 12 months. |
A. Businesses that employ fewer than 100 employees (not including casual employees that are not employed on a regular or a systemic basis); OR
B. Businesses with a turnover of less than $10,000,000 for the last income year. NOTE: The upfront price payable threshold has also been removed, although there is an increased threshold of $5,000,00.00 under the ASIC Act for small business contracts that is still applicable. |
| Penalties | Nil – but there are remedies to seek any loss incurred as a result of a term of a standard form contract that is declared to be unfair. | 1. For companies (Body Corporates) who enter into or propose a standard form contract containing an unfair term, or applying or relying on an unfair term in a standard form contract face a penalty, the greater of:
a. $10,000,000; b. Three (3) times the value of the benefit of the company received from the breach; or c. If the benefit cannot be determined, ten (10) per cent of annual turnover in the preceding 12 months. 2. Individuals in breach face a penalty of $500,000. NOTE: The current wording proposed, would mean a person can breach the prohibition multiple times in a single contract, as each term would be considered a separate contravention. Additionally, they can breach the prohibition for every occasion the unfair term in that contract is applied or relied upon. |
| Court Orders | If a court finds that a term is unfair, it can make a range of orders, including to:
A. Declare all or part of a contract to be void; B. Vary a contract; C. Refuse to enforce some or all the terms of a contract; D. Direct a party to refund money or return property to the party affected; E. Direct a party to provide services to the party affected, at the contravening party’s expense; F. Grant an injunction; G. Order the financial services provider to provide redress to the small business affected; or H. Make any other orders the court considers appropriate. |
A. Void, vary or refuse to enforce part or all of a contract if the court thinks this is appropriate to prevent or reduce loss or damage that may be caused:
B. Make orders injuncting persons from entering into any future contract that contains a term that is the same or substantially similar to a declared unfair contract term; C. The court can also injunct a person from applying or relying on a term in any existing contract that is substantially similar to the declared unfair contract term whether or not that contract is before the court; and D. Issue public warning notices and make orders disqualifying a person from managing a corporation. |
| What is a Standard Form Contract? | A Court is required to consider a number of matters, including but not limited to:
A. Whether one party was required to reject or accept the terms of a contract in the form in which they were presented; and B. Whether another party was given an effective opportunity to negotiate the terms of the contract. |
In addition to the current law a Court will need to consider whether one of the parties has used the same or similar contract before, BUT they cannot take into consideration:
A. Whether a party had an opportunity to negotiate minor or insubstantial changes to terms of the contract; B. Whether a party had an opportunity to select a term from a range of options determined by another party; or C. The extent to which a party to another contract or proposed contract was given an effective opportunity to negotiate terms of the other contract or proposed contract. |
| Other Amendments | – | A. It clarifies that remedies would be applicable to consumers as well as businesses; and
B. Certain clauses including due to Commonwealth, state or territory legislation will be exempt to remain compliant. |
D. WHAT DO YOU NEED TO LOOK OUT FOR?
We have included a list below of the usual suspects when it comes to unfair terms. Please be advised this is not an exhaustive list, and not all terms may appear in your contracts, but it gives you a general idea of what to look out for when entering into a new contract.
| Clause | Meaning | What You Need To Do |
| Unilateral Variations | Where only one party can change or modify the contract | All proposed variations to contracts should be agreed to by all parties. Terms should also allow for no additional fees to be payable should the contract need to be terminated due to a variation. |
| Termination | Where only one party can terminate but the not the other OR where one party is penalised but not another, for a breach or termination of the contract OR where one party is the only party allowed to determine if the contract has been breached. | Termination clauses should detail all the grounds a party is able to terminate the contract and should allow for either party to terminate should there be a breach. In addition, parties should be given the opportunity to rectify any breach prior to the contract being terminated. |
| Early Termination Fees | Where they are deemed to be excessive | Early termination fee does not automatically equate to the remainder of the contract term sum. It needs to be a genuine pre-estimate of the loss the non-terminating party will suffer. A number of factors should be considered, including any savings potentially made due to the termination. |
| Automatic Renewal | Where it automatically renews:
A. Without an opt-out option, or B. No express terms regarding renewing, or C. Cut-off date for the renewal can be amended by provider, or D. Cancellation of the renewal attracts an excessive fee. |
Renewal dates, cut-off dates and terms should all be expressly stated and not be subject to amendments without approval from both parties. If they are, then no additional fees should be payable by the non-agreeing party. |
| Limited Liability | Where parties excessively limit or avoid their liability under the contract, specifically negligence. | Liability can be limited but it must not limit a consumer’s right under the Australian Consumer Law. |
| Misleading Statements about Rights at Law | Statements that can mislead, confuse or misrepresent consumers about their rights. | The Australian Consumer Law provides specific wording when it comes to customer warranties and rights that should be included and not amended, especially ones that refer to defects. |
Any other terms that have similar effects or are worded to benefit one party over another will need to be looked at more closely, with businesses needing to prioritise reassessing their risk when entering into standard form contracts. With the uncertainty surrounding when a term will be deemed unfair, business need to reconsider certain terms.
E. WHAT SHOULD BUSINESSES BE DOING NOW?
Although the Bill is yet to become law, there are steps businesses can take to help better prepare themselves for the foreseeable future:
- Assess if any of your contracts would fall under the unfair contract term regime;
- Check whether terms that have already been deemed void or unenforceable by the Court under the regime are in your standard form contracts;
- Update any current templates you may have and putting a plan into place for standard form contracts that may automatically renew after the new regime takes effect;
- Decide whether alternate contracts would be more suitable for parties now classified a small business under the new definition (you may need to get written confirmation from them annually to ascertain their turnover as well!); and
- Review and amend, if necessary, any terms in your standard form contracts that are bias towards you and determine whether these terms are reasonably necessary to protect your legitimate business interests.
Constructive Legal Solutions is here to assist with reviewing your standard form contracts to ensure they do not contain unfair contract terms. Call 1300 972 092 or send your enquiry to admin@constructivelegalsolutions.com.au for tailored advice.
