Closing In On Stronger Australian Unfair Contract Terms Laws

Posted on by Iain Irvine

Unfair terms in standard form small business contracts are void under section 23(1) of the Australian Consumer Law. Between 23 August 2021 – 20 September 2021 the Australian government invited public submissions on an Exposure Draft of a bill to strengthen these laws. Persons entering into template supply terms, service agreements, franchise agreements, distribution agreements, licence agreements and other “standard form” commercial contracts in Australia should consider the impact of the proposed reforms on the form of those contacts.

Penalties to be introduced

Presently, there is no penalty for reliance on an unfair term. The remedy available to a party seeking to avoid such a term or to the regulator, the Australian Competition and Consumer Commission, is a declaration that the term is void. The proposed amendments provide for a pecuniary penalty to be imposed upon a person who:

  • enters into a standard form small business contract containing an unfair term which the person proposed; or
  • applies or relies on, or purports to apply or rely on, an unfair term in a standard form small business contract.

The maximum proposed penalties are:

  • for a company, the greater of:
    • AU$10 million;
    • Three times the value of the benefit obtained; or
    • If the value of the benefit cannot be determined, 10% of the company’s annual turnover; and
  • for a natural person, AU$500,000.

Small business contract redefined

Presently, to meet the definition of a small business contract:

  • One party must employ fewer than 20 people; and
  • The upfront price under the contract must be not more than AU$1 million for contracts with a term of longer than 12 months or AU$300,000 for shorter term contracts.

The proposed amendments replace these criteria with a requirement that one party satisfies either or both of the following:

  • The party employs fewer than 100 employees. Casual employees are counted if employed on a regular and systematic basis and part-time employees are counted as a fraction of full-time equivalent.
  • The party’s annual turnover for the last income year is less than AU$10 million.

These amendments significantly broaden the parties who will have the benefit of these laws. The removal of the contract value thresholds will also result in the laws applying to much larger contracts.

Presumption of unfairness

Under the proposed amendments, if a court has found a term to be unfair, that term or a substantially similar term will be presumed to be unfair in separate proceedings if either:

  • The person who proposed the terms in both proceedings is the same; or
  • The contracts are entered into in the same industry.

This presumption will assist complainants where the same unfair term has been used repeatedly. If the amendments are adopted companies who use standard form contracts repeatedly should monitor judgements in their industry to ensure they are not proposing terms which have been determined to be unfair.

Meaning of standard form

The proposed amendments invite a court in determining whether a contract is standard form to take account of how often a party has used the contract. Further, when considering the extent of negotiation (another factor a court may consider) the proposed amendments direct a court not to take into account:

  • An opportunity to negotiate minor or insubstantial changes;
  • An opportunity to select terms from a range of options provided by the other party; or
  • Opportunities given to negotiate other contracts.

Commencement and application

It is presently uncertain when the bill will be finalised and put before Parliament. The draft bill provides for commencement 6 months after the bill receives royal assent. The changes will apply to standard form small business contracts entered into or renewed after commencement. They will also apply to terms of existing contracts which are varied on or after the commencement date.

The public consultation on the Exposure Draft is another step towards a significant broadening of Australia’s unfair standard form contract terms regime. Any businesses who use standard form contracts in Australia should obtain advice on the impact of the proposed amendments.