Posted on February 14, 2024
Gabriella Govic
Businesses tend to neglect their legal affairs over the Christmas period which can prove costly to their commercial dealings in the new year.
We therefore remind businesses of the amendments to the Unfair Terms Regime (the Regime) of the Australian Consumer Law that came into effect on 9 November 2023.
The amendments significantly expand the scope of contracts regulated by the Regime and introduced pecuniary penalties for those contracting under unfair terms.
We note that the substantive test for unfair terms has remained unchanged by the amendments. A term will continue to be rendered unfair pursuant to the Regime if, upon analysis of the contract as a whole, the term:
• causes a significant imbalance between the rights of the parties;
• is not reasonably necessary to protect the legitimate interests of the party who seeks to rely on the term; and
• would cause detriment if the term were to be relied upon.
The principal amendments to the Regime are summarised below to assist businesses in better understanding how the amendments may impact their commercial dealings.
1. What contracts are caught by the Regime?
The Regime continues to apply to consumer and small business standard form contracts. However, what constitutes a standard form and small business contract has been amended in accordance with the reform.
Standard Form Contracts
The Regime does not identify requisite criteria a contract must satisfy to be considered standard form, but rather outlines factors to be taken into consideration. In accordance with these factors, a standard form contract is characteristically prepared by the party with the greater bargaining power on a ‘take it or leave it’ basis. The recent amendments further state that a contract is more likely to be standard form if the same contract or a contract of substantially similar terms has been used repeatedly in previous business dealings.
Notably, the amendments clarify that a contract may still be standard form in instances where parties have engaged in preliminary, insubstantial negotiations or have had the opportunity to select a contract term from a range of options.
Small Business Contracts
The reform further expanded the definition of ‘small business contracts’ to include contracts whereby at the time of execution, one party had:
• fewer than 100 employees; and/or
• an income in the previous financial year that did not exceed $10,000,000.
Consumer Contracts
The definition of consumer contracts remains unchanged by the amendments and continues to include contracts for the sale of goods or services predominately for personal, domestic or household use.
2. What are the consequences of a term being rendered unfair?
Previously, there were no pecuniary penalties for parties who breached the Regime. The recent amendments have introduced significant pecuniary penalties under the Regime for proposing, applying or relying on unfair contract terms.
Companies may face pecuniary penalties in the greater of:
• $50,000,000;
• Three times the benefit obtained by the company from the contravention if capable of being determined by the Court; or
• 10% of the company’s annual turnover if the relevant benefit is indeterminable.
Previously, an unfair term would be rendered automatically void if in contravention of the Regime. The amendments have since granted Courts greater discretion to vary the terms of the contract or render the entire contract void if considered appropriate by the Court.
3. What are the next steps for businesses?
The reforms should put businesses on notice of the Court’s commitment to ensuring equal bargaining opportunity between contracting parties. Businesses should review the terms that govern their current commercial dealings.
If you have entered, renewed, or varied a standard form small business or consumer contract since 9 November 2023, we recommend seeking legal advice from one of our experienced commercial lawyers. Our team will assist you in assessing whether your contracts are compliant with the statutory regime.
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