Unfair Contract Terms - New Risk of Penalties

Current regime

Under the current unfair contract terms regime contained in the Australian Consumer Law (ACL), there are three elements that must apply for a term of a contract to be considered an unfair contract term. The term must be:

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Changes to the current regime

The new bill introduced to parliament proposes to significantly broaden unfair contract terms protections, by changing the approach to two of the three elements outlined above.

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Courts will be able to order pecuniary penalties against a person if they propose, apply, rely or purport to apply or rely on, an unfair contract term. Under section 224 of the ACL, the maximum amount of this penalty is $500,000 for an individual, or for a body corporate the greater of:

• $10,000,000;
• 3 times the value of the benefit derived from the unfair term; or
• 10% of the annual turnover of the body corporate during the preceding 12-month period.

Courts also have broader powers more generally. Previously, where a court determined a term in a standard form was unfair, it was automatically void. Courts will now be able to void, vary or refuse to enforce the contract, if it is likely to prevent loss or damage that is likely to be caused.

Further, courts will be able to make orders preventing a term that is the same or substantially similar in effect to a term that is deemed to be unfair, from being included in any future standard form small business or consumer contracts.

Examples of Unfair Contract Terms

Some common examples of unfair contract terms are terms that:

• allow one party to unilaterally vary a contract;
• avoid or limit a party’s liability for negligence;
• only allow one party to terminate the contract; and
• have one party indemnifying the other for losses out of their control.

Commencement

The changes contained in the Bill commence one year after royal assent is provided. These changes apply to relevant contracts that are made, renewed, or varied on or after the one year anniversary of royal assent.

Conclusion

Businesses who use standard form contracts should begin reviewing such contracts to ensure no term could be construed as ‘unfair’ and consider moving to more bespoke contracts to protect themselves from the unfair contract term legislation discussed above.

Small businesses who will be protected under the new regime and feel they are subject to an unfair term should seek advice as to whether any terms contained in a ‘standard form’ contract they have entered into are in fact unfair terms.

This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.