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Resources Major Penalties for Unfair Contract Terms Now Live

  • Posted by Insight by Anitah Kumar
  • Published Current as at 8 November 2023
  • Category Insights

Changes to Australian Consumer Law regarding unfair contract terms are now in effect, commencing 9th November 2023. These changes are significant, capturing many more Australian businesses under the provisions and introducing major penalties. This charged combination could leave many businesses exposed, where agreements that previously sat outside of the provisions now qualify.

We’ve outlined the key changes below. We recommend all businesses review their agreements and processes to avoid potentially damaging consequences

Unfair Contract Terms Provisions

Under Australian Consumer Law, any standard form contract entered into with a consumer or small business is subject to unfair contract terms provisions.

An unfair term is one that:

  1. Would cause a significant imbalance in the parties’ rights and obligations under the contract;
  2. Is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  3. Would cause detriment.

A court can declare a term of a standard form contract to be unfair, rendering it void.

Previously there were no additional penalties for unfair contract terms; however, this has now changed.

Small Business Definition

Previously, a small business contract was defined as a contract with a business that employs 20 people or less, and where the price of the contract does not exceed a $300K upfront payment, or a $1M payment over a 12-month period.

Under the new laws, this definition of a small business will be expanded to include businesses with 100 employees or less, and/or businesses with an annual turnover of less than $10M. This is a substantial increase that captures many more contracts under the provisions.

Determining Standard Form Contracts

A standard form contract is typically prepared by one party and not subject to negotiation – it is offered on a ‘take it or leave it’ basis. The court will ask several questions when determining whether a contract is deemed to be a standard form contract, including:

  1. Does one party hold all the bargaining power?
  2. Was the contract prepared prior to any discussion between the parties?
  3. Was there an opportunity for negotiation?
  4. Was the client presented with only the opportunity to accept or decline the contract in its current form?
  5. Was there a specific consideration for the parties of the contract (or is it one used for every contractual relationship)?

As of 9 November 2023, a contract may be deemed to be a standard form contract even where there has been opportunity for minor negotiation or where the other party has had the option to choose between several contracts.

Penalties for Breach

The previous penalty for entering a standard form contract with unfair terms is that the unfair term, and potentially the contract as a whole, may be rendered void.

The new laws introduce monetary penalties for breach.

Maximum penalties for companies:

  • $50M
  • 3 x value of the benefit (if determinable)
  • 30% of the adjusted turnover during the period of the breach, or the previous 12 months (whichever is longer)

Maximum penalty for individuals:

  • $2.5M

Importantly, each individual term contained in a contract will constitute a separate contravention if it is deemed unfair. As a result, a person can be found to have multiple contraventions in a single contract.

Application to New, Altered and Existing Contracts

The changes in legislation apply to any new or renewed contract entered into from 9 November 2023. The proposal, reliance, and use of unfair contract terms will be prohibited, and penalties will apply.

Where a term is varied or added to an existing contract after 9 November 2023, the new legislation applies.

What does this mean for you?

The threshold changes mean a vast number of previously exempt contracts now fall under the unfair contract terms provisions, and the introduction of high penalties leaves no room to run the risk of breach.

All businesses should review and update agreements and processes to ensure they comply with the new requirements. Contact us if you would like assistance in this process.