Significant reform for unfair contract terms law: penalties for non-compliance

The protections available for consumers and small businesses in relation to unfair contract terms are set to be expanded.

The Commonwealth and State and Territory consumer affairs ministers have announced their intention to strengthen unfair contract terms protections under the Australian Consumer Law. The recommended amendments will mean that more contracts will be subject to the unfair contract terms laws and penalties will be introduced for the use of an unfair term in certain contracts.

A commencement date has not yet been advised and draft legislation has not yet been published.

What are the current laws in relation to unfair contract terms?

Under both the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)) and the Australian Securities and Investments Commission Act 2001 (Cth), a contract term may be considered unfair if it:

  • would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  • is not reasonably necessary in order 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.

These protections apply to consumer and small business standard form contracts. A standard form contract is a contract prepared by one party and offered on a ‘take it or leave it’ basis (i.e. no negotiation).  If a term is found by a court to be unfair, the term will be void.

What are the reforms to unfair contract terms laws?

While draft legislation has not yet been published, it is proposed that key reforms will include:

  • making unfair terms unlawful and granting courts the ability to impose large civil penalties for the use of unfair contract terms in relevant contracts (rather than the current situation where no penalty may be applied by a court and an unfair term is deemed to be void);
  • significantly expanding the definition of ‘small business’ to cover businesses with up to 100 employees (instead of 20 employees) with an annual turnover not exceeding $10 million (where previously the upfront price payable had to be less than $300,000 for contracts under one year in duration and less than $1,000,000 for contracts in excess of one year in duration); and
  • clarifying the definition of ‘standard form contract’ and providing further guidance on when the protections will apply.

The reforms aim to reduce the prevalence of unfair contract terms in standard form contracts and improve consumer and small business confidence when entering into contracts.

What should businesses do to prepare for the proposed change?

We recommend that businesses start preparing for the reforms by:

  • reviewing standard form contracts to ensure they do not contain any unfair contract terms;
  • revisiting any standard form contracts already in place to identify whether any may be covered by the expanded definition of a ‘small business contract’ and therefore be potentially subject to the amended unfair contract terms laws; and
  • obtaining specific legal advice in relation to any potentially unfair terms.

We will provide an update with further details once draft legislation is released.

More information

If you have any queries or would like further information about this article, please contact:

Kathryn Speed
Principal
M: 0408 446 013
E: kspeed@pageseager.com.au

Ella Wade
Lawyer
T: (03) 6235 5161
E: ewade@pageseager.com.au

Sarah Standen
Law Graduate
T: (03) 6235 5147
E: sstanden@pageseager.com.au

Published: 10 June 2021

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