Recently, the Government amended the Australian Consumer Law and the Australian Securities and Investment Act 2001 in order to provide additional protections for parties who sign up to unfair terms in standard form contracts. They also significantly increased the pecuniary penalties a company can face if they violate the law. The amendments received Royal Assent on November 6 2022. These Amendments have significant consequences for both large and small businesses alike and may result in your re-evaluation of business contracts and change in your practices.
Changes to Unfair Contracts Terms in Standard Form Contracts
Definition of Unfair
Note that a Contractual Term is considered “unfair” under S 24 of the Australian Consumer Law if it
- Would cause a significant imbalance in the parties rights and obligations
- Not reasonably necessary to protect the business interest of the party relying on the term
- Would cause a detriment to a party if it were enforced
Changes to Definition of a Standard Form/Small Business Contract
Currently, there is no definite decision on what constitutes a standard form contract. However, courts were free to consider the following on deciding whether a contract is standard or not
- Whether one party has most if if not all the bargaining power,
- Whether if one party solely prepared the contract prior to it’s execution without negotiation
- Whether the contract must be accepted in a take or leave it basis
Examples of standard form contracts include gym memberships, contract for airline tickets and clickwrap contracts on websites.
Previously, an entity that had more than 20 employees or formed a contract with a greater value than $300,000 could not come under the Standard Contract Regime in the ACL. However, the Amendment will expand the scope of the Standard Contract Regime as it can now apply to entities with
- Less than 100 employees (excluding casuals) or
- Less $10 million in annual turnover
Note that protections under the ASIC Act will now apply to contracts if
- the upfront price payable does not exceed $5,000,000; and
- one party to the contract employs fewer than 100 people; or
- has a turnover for the last income year of less than $10,000,000.
Moreover, now the mere fact that parties can negotiate some minor aspects of an agreement will not prevent it from being viewed as a standard contract.
New Penalties for Unfair Contract Terms in Standard Form Contracts
Previously, if Unfair Contract Term was present in a Standard Form Contract the Court could declare the contract, or the unfair part of the contract void and unenforceable at their discretion. They could also provide an injunction preventing a partying on relying on such terms.
However, the Amendment will enforce actual financial penalties against parties who include unfair terms in their contract and not merely make the contract void. The penalties will apply if the contractual term is substantially similar to an unfair term, as parties cannot repeatedly rely upon these similar terms in the future standard contracts.
Increases in the Maximum Penalties under the Australian Consumer Law.
The maximum penalty an entity can receive under the ACL has now been increased almost five fold. Entities can be fined the greatest amount between
- 3 times the value of the benefit they received by relying upon an Unfair Contractual Term
- 30% of their annual turnover during the period they breached the Australian Consumer Law
- $50 million
This is as significant change as large corporate entities often have annual turnovers that exceed $1 billion. As a result, they could be potentially fined hundreds of million of dollars for relying upon unfair terms in their standard contracts.
Key takeaways
Although the bill received Royal Assent during November 2022, the changes to the definition of Standard and Small Business Contracts will come into force during November 2023.
If you are a large business that relies uses standard contacts when dealing with smaller business it is recommend you
- Review pre-existing standard contracts
- Remove any potentially unfair terms
Businesses that receives commercial work using standard contracts you should review such contracts for unfair terms and be aware of your new rights if you are an entity with less than 100 employees or if you have annual turnover of less than $5 million.
If you are unsure of the implications of these amendments, we recommend you contact us today 1300 337 997 or through the contact form on this page. We can review any standard form contracts you have and inform of your rights and obligations.
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
