UNFAIR CONTRACT TERMS – Will changes to the regime impact your business?

The unfair contract terms regime currently exists to prevent power imbalances between parties to contracts. To strengthen this regime, the Federal Government has recently passed new laws to broaden the scope of the unfair contract terms provisions and increase the consequences of breaching these provisions.

These changes are set to take effect on 9 November 2023 and will impact a range of businesses.

What are unfair contract terms?

Generally, a term in a contract will be considered unfair if all of the following apply:

·   the term will cause a significant imbalance in the parties’ rights and obligations under the contract; and

·   the term is not reasonably necessary to protect the legitimate interests of the party that benefits from the term; and

·   the term would cause detriment to a consumer if used or relied upon.

What is the current law?

The unfair contract law regime currently only covers the following types of contracts:

     Standard form contracts: 

Non-negotiable, “take it or leave it” contracts; and

Small business contracts

Contracts where at least one party has less than 20 employees and where the upfront price payable under the contract does     not exceed $300,000 (or $1 million if the contract is for 12 months).

If a term is found to be unfair under the current regime, it is considered invalid and unenforceable. However, the remaining terms of the contract will continue to apply to the parties if the contract can operate without the unfair term.

How is the law changing?

From 9 November 2023, the unfair contract term regime is changing to increase the range of contracts covered by the legislation and to empower the court to impose harsh penalties on breaching parties.

It will be an offence to:

·   enter into a small business or standard form contract with an unfair term; or

·   seek to rely on an unfair term in a small business or standard form contract.

Definition of small business

The definition of small business contract will be changed to cover a contract where either:

·   at least one party has fewer than 100 employees; or

·   at least one party has a turnover of less than $10 million in in the last income year.

This change increases the scope of the definition of ‘small business’ and removes the upfront price cap currently in place.

Penalties

The following maximum penalties will be available to the court for breaches of the unfair contract terms regime:

Businesses – the greater of:

·   $50 million;

·   Three times the value of the “reasonably attributable” benefit obtained from the conduct (if this can be determined);

·   If the benefit cannot be determined, 30% of the business’ adjusted turnover during the breach period.

Individuals:

·   $2.5 Million 

The unfair contract term will also be considered void and unenforceable, and the court may exercise powers to provide further remedies to address unfair contract terms.

We can help

We are experienced in drafting and reviewing contracts and providing advice to ensure your agreements are enforceable and comply with the new legislation. Our expertise also extends to reviewing and negotiating contracts to achieve the best deal for your business.

Please contact Elinor Riley on (03) 9629 9629 to discuss how we may assist you.