Unfair Contract Terms
Insights by Edward Hart (Associate), Scott McKenzie (Director), Velocity Legal
New draft legislation has both extended and clarified existing Unfair Contract Term (UCT) protections in Australia. The changes ensure that the UCT protections contained in the Australian Consumer Law (the ACL) and the ASIC Act will now apply to more business-to-business contracts, giving greater certainty to small businesses. It is likely the changes will come into effect in the first half of 2022.
Businesses and individuals can face penalties on the basis of proposing, applying or relying on an UCT. The ACL applies to UCTs in contracts for goods and services and the sale or grant of an interest in land. The ASIC Act applies to UCTs in contracts for financial products and services.
Types of contracts protected
The protections apply to contracts that are both ‘standard form’ contracts and small business contracts. Many more contracts will now be considered ‘small business contracts’. It will be sufficient for one party to have fewer than 100 full or part-time employees or annual turnover under $10 million dollars. Part-time employees will be counted as an appropriate fraction of a full-time equivalent.
Currently, one party must have fewer than 20 full or part-time employees and the value of the contract must not exceed $300,000 if payable up front or if the contract has a duration of more than 12 month, $1 million.
Examples of unfair terms
Examples of unfair terms includes, but is not limited to, terms that:
- are excessively onerous;
- extend well beyond what is necessary to protect a party’s legitimate interests;
- allow one party, but not the other, to change the contract;
- penalise one party, but not the other, to determine breaches of the contract;
- limit a party’s rights to sue another party; or
- avoid or limit liability for negligence.
Other key changes to the protections include:
- clarification of the powers of courts to make orders to void, vary or refuse to enforce part or all of a contract;
- courts can no longer consider whether a party was given an effective opportunity to negotiate or consider the terms of an agreement when deciding if a contract is a standard form; and
- creation of a rebuttable presumption that terms are unfair where they have been found to be unfair by a court previously and are included in a contract in similar circumstances.
‘Standard form’ contracts
One of the key purposes of these changes is to provide protection to consumers and small businesses that can lack the bargaining power and resources to effectively review and negotiate contract terms that are often sent in standard form contracts on a ‘take it or leave it’ basis.
Whilst there is no current definition of a standard form contract, courts have previously categorised contracts that provide little room for negotiation as standard form.
To ensure contracts are not avoiding categorisation as standard form contracts to avoid UCT protections, under the new changes courts will no longer be able to consider whether a party had an opportunity to negotiate minor terms or select a term from a range of options given by the other party. The court must also disregard the fact that a party to a similar contract has been given a chance to effectively negotiate terms of the proposed contract.
Strict new penalties
Under current legislation, unfair contract terms are simply void and unenforceable. Under the new amendments, inclusion of such terms will result in strict new penalties designed to punish stronger parties including unfair terms in their favour. Inclusion of such terms will result in companies paying a penalty of the greater of:
- $10 million;
- 3 times value of the benefit the company obtained from the breach of the law (if quantifiable); or
- 10% of company’s annual turnover (if not quantifiable).
The maximum penalty against individuals will be $500,000. Importantly, the penalties apply to each unfair term included in a contact.
Protection of interests
Given the significance of these reforms, we recommend that businesses get legal advice if they either:
- have a ‘standard’ set of terms and conditions that they use; or
- are looking to enter into a contract with a supplier (including any supplier of goods or services).
Failing to get legal advice regarding these items can expose businesses to unpalatable legal risk, and the associated financial consequences that follow.
Edward loves all things law, particularly commercial and employment law. He enjoys thinking outside the box and is driven by achieving the best outcomes for his clients. Outside of work, Edward enjoys cooking up a storm and playing for his basketball team on Thursday nights.
Scott has been recognised as a leading commercial lawyer in Australia. He is held in high regard for his strategic mindset and is renowned for being technically sharp. Scott’s practice covers all aspects of commercial law, with a strong emphasis on complex transactions and business co-ownership matters. Scott is focused on leading by example. He provides precise advice and tenaciously protects his clients.
Accredited Specialist in Commercial Law.