Major changes place standard form contracts at risk

Major changes place standard form contracts at risk. Will this affect your business?

If you use standard terms and conditions or contracts with your customers, incoming changes may have a serious impact on your business.

From November 2023, changes to the Australian Consumer Law come into effect. These changes will introduce penalties against businesses and organisations for proposing, using, or relying on unfair contract terms (UCT) when dealing with consumers and small businesses. The new laws will apply to all standard form contracts entered into or renewed, or in which terms are varied or added on or after 9 November 2023.

What is a standard form contract and to what contracts do the new UCT laws apply? 

Standard form contracts are a template document used repeatedly (with little or no variation) by companies. They are generally offered to a customer, supplier, or service provider on a ‘take it or leave it’ basis. Usually they are drafted to benefit the party providing the contract and as such these changes in the law aim to protect consumers and small businesses from being taken advantage of. Examples include (but are not limited to) website terms and conditions, software licences, terms of trade, terms and conditions attached to an invoice or purchase order, conditions of entry to a place or event, or engagement letters for the provision of a professional service.

Contracts impacted by the change include those for the supply of goods or services, or a sale or grant of an interest in land, where the other party is a consumer or small business.

• A consumer is someone who enters into the contract for wholly or predominantly personal, domestic or household use or consumption¹.
• A small business contract will now be one in which the other party employs less than 100 people or any business with an annual turnover of less than $10 million.

The UCT provision will apply regardless of the value of the contract.

What is an unfair contract term?

The test for whether a term is unfair has not changed. A term is unfair if:

(a) it would cause a significant imbalance in the parties’ rights and obligations under the contract;

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c) it would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.

In determining whether a term is unfair, the court can consider whether the term is transparent (in reasonably plain language, legible, presented clearly and readily available to any party affected) and the effect of the contract as a whole.

Some examples of unfair contract terms include:

• unilateral rights to avoid or limit performance or to terminate for convenience (meaning to end a contract without the other party having done anything wrong);
• unilateral rights to vary the terms of the contract; 
• one-way excessive penalties for early termination or breach; 
• automatic renewal terms without notice, free trials that automatically convert to paid subscriptions without notice, and unilateral rights to extend or renew a contract an unlimited number of times;
• payment terms that provide unilateral rights to increase fees without the affected party being given a right of termination, requirement of pre-payment with no right of refund for unused services/products; 
• one-way indemnities or limitations of liability that are too broad or unreasonable. 

Each term that is unfair will be considered a separate contravention of the law.

What are the consequences?

1. Similar terms

The new provisions allow a court to prevent a term (similar term) that is the same or substantially similar to a term declared to be unfair to be included in any future standard form, consumer or small business contract that the respondent is a party to².

The court may also make orders to redress loss or damage caused or prevent or reduce loss or damage likely to be caused, as a result of a similar term included in a standard form, consumer or small business contract to which the respondent is a party³. 

The orders a court may make to effect the above include, injunctions to restrain the respondent from making any future contract with a similar term or relying on a similar term, voiding the contract in whole or in part, or vary the contract/s, or refuse enforcement of any or all provisions of the existing contract/s⁴.

2. Criminal penalties

Courts will be able to impose significant penalties on businesses and individuals who breach the UCT provisions. The maximum penalty for businesses will be the greatest of:

• $50,000,000;
• three times the value of the reasonably attributable benefit obtained from the conduct; or
• if a court cannot determine the benefit, 30% of adjusted turnover during the breach period.

The maximum penalty for individuals is $2.5 million.

There is no defence where you mistakenly believe the other party to a contract to be outside of the UCT provisions.

Next steps

If you use standard form contracts in your business these should be reviewed prior to November 2023. Legal advice should be sought to ensure compliance with the new UCT laws. Keep in mind, however, that if your contract started before November 2023, and you don’t renew or modify it after the changes come in, they aren’t subject to this regime.

Wallmans Lawyers are willing and able to assist with these reviews as needed. Please contact us early to ensure reviews can be completed before Thursday 9 November 2023.

¹ Interpretation of personal, domestic or household has been interpreted broadly.
² Treasury Laws Amendment (More Competition, Better Prices) Act 2022, s 243B
³ Treasury Laws Amendment (More Competition, Better Prices) Act 2022, s 243B
⁴  Treasury Laws Amendment (More Competition, Better Prices) Act 2022, s 243B