Unfair Contracting Terms - Beware of your standard form contracts!
From 9 November 2023, new legislation will come into effect with changes to the Australian Consumer Law, which will prohibit businesses from proposing, using, or relying on unfair contracting terms in “standard form contracts” with consumers and small businesses, and will allow the Court to impose substantial penalties. The test for whether a contract term is unfair has not changed. However, businesses now could potentially face substantial penalties for contravening the law where, currently, a Court can only declare specific terms of a contract unfair and therefore void.
The unfair contract term (“UCT”) regime currently applies to consumer contracts (i.e. contracts for the supply of goods or services with individuals who acquire it predominantly for personal, domestic, or household use) as well as to small business contracts (i.e. contracts for the supply of goods or services with a business that employs fewer than 20 persons, and where upfront contract is less than $300,000). From 9 November 2023, the UCT regime will apply if the contract is for the supply of goods or services to a business that employs fewer than 100 persons or has an annual turnover of less than $10M in the prior financial year.
A “standard form contract” is not defined under the ACL, however, in broad terms, a standard form contract will typically be one that has been prepared by one party to the contract and is not subject to negotiation between the parties—that is, it is offered on a ‘take it or leave it’ basis. Standard form contracts are typically used for the supply of goods and services to consumers in many industries, including domestic building.
In deciding whether a contract is a standard form contract, a court may consider a range of relevant matters but must take into account:
whether one of the parties has all or most of the bargaining power in the transaction;
whether the contract was prepared by one party before any discussion occurred between the parties about the transaction;
whether the other party was, in effect, required to either accept or reject the terms of the contract in the form in which it was presented;
whether the other party was given an effective opportunity to negotiate the terms of the contract; and
whether the terms of the contract take into account the specific characteristics of the other party or the particular transaction.
A term of a contract is unfair if it:
would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The maximum financial penalties for businesses under the new UCT law are the greatest of:
$50,000,000;
three times the value of the "reasonably attributable" benefit obtained from the conduct, if the court can determine this; or
if a court cannot determine the benefit, 30 per cent of adjusted turnover during the breach period.
(The maximum penalty for an individual is $2.5 million.)
