Overview

Businesses commonly use standard form contracts to improve efficiencies and protect their legal interests.  

Under the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (Cth) (Unfair Contract Laws) certain terms in standard form contracts may be declared (by a court) to be void and unenforceable if they are ‘unfair’.  The Unfair Contract Laws are designed to protect consumers and certain small businesses.

The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 was recently introduced to parliament to significantly amend the Unfair Contract Laws to:

• broaden the type of contracts that may be caught by the Unfair Contract Laws; and
• introduce significant civil penalties for contraventions.

It is proposed that the amendments will not come into force until 12 months after the Bill receives Royal Assent. This will enable businesses a ‘grace period’ to prepare and implement any changes required to their business practices.

What types of contracts do the Unfair Contract Laws apply to?

A ‘standard form’ contract is typically prepared by one party and offered on a ‘take it or leave it’ basis.

Broadly, the Unfair Contract Laws apply to standard form ‘consumer’ contracts and ‘small business’ contracts, noting that there are some particular types of contracts that are expressly excluded (e.g. constitutions).

‘Consumer’ contracts are generally contracts for the supply of goods or services or the sale or grant of an interest in land to an individual who acquires it wholly or predominantly for personal, domestic or household use or consumption.

‘Small business’ contracts are generally contracts:

• that are for the supply of goods or services or the sale or grant of an interest in land;
• where at least one of the parties is a small business (employs less than 20 people, including casual employees employed on a regular and systematic basis); and
• where the upfront price payable under the contract is no more than $300,000 (or $1 million if the contract is for more than 12 months.).

What are ‘unfair’ contract terms?

A contract term may be ‘unfair’ if it:

• causes a significant imbalance in the parties’ rights and obligations;
• is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
• causes financial or other detriment (such as delay) if it were relied on.

Only a court can decide whether a contract term is unfair.  In making its decision, a court must consider how transparent the term is, and will consider the overall rights and obligations of each party under the contract (as a whole).  

The Unfair Contract Laws do not apply to contract terms that:

• set out the price;
• define the product or service being supplied; or
• are required or permitted by another law.

How will things change if the Bill is passed?

Under proposed amendments (in summary):

• the proposal of, use of, application of, or reliance on unfair contract terms would be prohibited;
• many more contracts will be considered ‘small business contracts’; and
• significant civil penalties and other remedies could be imposed for contraventions.

The threshold for what is a ‘small business contract’ will be lowered to include contracts where one party to the contract has either fewer than 100 employees or an annual turnover below $10 million. In circumstances where the ASIC Act applies (i.e. in relation to financial products and services) there will be an additional requirement that the upfront price payable under the contract does not exceed $5 million.

Further, a contract may be considered a ‘standard form contract’ despite the opportunity for a party to negotiate minor changes to the contract or select a term from a range of options provided.

Under the existing Unfair Contract Laws, the key risk arising from using unfair contract terms is that a court may declare such terms to be void and unenforceable.  Under the proposed amendments, significant civil penalties could apply a contravention.  For a company, the maximum penalty for a contravention of the Unfair Contract Laws will be the greater of:

• $50 million;
• three times the value of the benefit the company obtained from the breach; and
• if the court is unable to determine the value of the benefit the company obtained, 30% of the company’s turnover during the breach period.

Do I need to do anything?

If the Bill is passed, businesses will need to move quickly to:

• identify and review their standard form contracts to ensure they do not contain unfair contract terms; and
• implement any necessary changes to their standard form contracts and business practices.

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For more information, please contact any member of the Sierra Legal team, whose contact details can be found here (LINK).