The unfair contract terms regime under the Australian Consumer Law and the Australian Securities and Investments Commission Act is set to be amended, with a suite of enhancements to be introduced targeting standard form contracts.

The proposed changes do not depart significantly from the present regime, however, they do widen its current scope, application and remedies. Critically, significant pecuniary penalties (i.e. fines) will apply to a contravening party.

Unfair contract term legislation

The current regime seeks to deter and, where appearing, to void unfair contract terms in standard form contracts (including consumer contracts and small business contracts).

Standard form contracts are those in which the terms and conditions are drafted by one party to the contract with little input from or ability by the other party to negotiate those terms. They may be contracts which are given on a ‘take it or leave it’ basis or those which are used repeatedly with little or no customisation depending on the circumstances or preferences of the other party, sometimes known as ‘boilerplate’.

Standard form contracts are the focus because the legislation presumes a greater likelihood of uneven or non-existent capacity for negotiation between parties regarding the terms in these contracts.

A term in a standard form contract will be presumed to be unfair where it:

  • Creates an imbalance in the rights of the contracting parties;
  • Is not necessary for the legitimate protection of a party’s interests; and
  • Would cause detriment to a party (such detriment being financial or otherwise).

Usually, the court will consider a term unfair if it is gives unilateral power, for example where one party has the only say in whether to terminate or alter the contract, to penalise the other party, or to solely bestow a benefit upon itself.

Changes to the regime

Treasury has undertaken a review of the unfair contract terms regime and found that deterrence against the use of unfair terms in standard form contracts is currently insufficient.

A number of specific shortfalls have been identified, including:

  • Continued exploitation of contract power imbalances;
  • A lack of clarity as to whether contracts are to be considered ‘standard form’;
  • That the current ‘small business’ definition and the contract value threshold are inadequate.

The Treasury Laws Amendment (Measures For a Later Sitting) Bill 2021: Unfair Contract Terms Reforms has been published in draft. Public consultation on this Bill has recently concluded and the Bill is expected to be introduced as law in the near future. The most important proposed changes to the current regime are:

  • The introduction of pecuniary penalties for parties found be to be relying on, enforcing or even proposing an unfair term;
  • A redefining of ‘small business’ to mean those with fewer than 100 employees (previously 20 employees), or with an annual turnover of less than $10 million;
  • There will no longer a value threshold for determining small business contracts, where currently there must be an upfront price of less than $300,000, or $1 million in contracts with a term of more than 12 months;
  • Courts will have the power to order the variation of a contract or refuse to enforce part or all of a contract containing an unfair term;
  • Where a term is found to be unfair, that declaration of unfairness can extend to similar terms not only in other contracts involving the contravening party but also to terms in contacts existing in the same industry, regardless of those contracts not themselves being before the court.

What is the significance of these changes?

A party proposing or utilising an unfair contract term may become liable to heavy pecuniary penalties. These may be up to $500,000 for a party that is not a body corporate (i.e. individuals). For a party that is a body corporate, penalties will be the greater of: three times any benefit received due to the unfair term, 10% of its annual turnover or $10 million.

Such penalties will be calculated by foreseeable damage flowing from an unfair contract term, rather than proven damages.

Furthermore, a single contract may contain multiple unfair terms, giving rise to multiple offences.

In recent years, the ACCC and ASIC have demonstrated they are willing to pursue contracting parties suspected of or deemed to be using unfair terms. This may be of particular concern to sectors which the ACCC has indicated are priorities for enforcement and compliance including funeral services, digital platforms, energy and telecommunications (and other essential services), financial services and franchises.

Whether you are concerned that you are utilising standard form contracts with unfair terms, wish to avoid doing so or are a party to an unfair contract, NextGen Legal is happy to assist in reviewing and advising on your contract terms. Please contact our office on (03) 9039 2142 to book an appointment.