The Clock is Ticking on Unfair Contract Terms… Are You Ready?

Unfair contract terms have long been a concern in legal agreements, often placing consumers and small businesses at a disadvantage.

To address these issues and promote fairness, significant changes to the law on unfair contract terms are set to come into effect on November 9, 2023. These changes are aimed at better protecting consumers and small businesses from unfair clauses within standard form contracts. This article delves into the key modifications and what they mean for individuals and enterprises.

The Current Landscape

Unfair contract terms have historically posed a challenge to those entering into standard form contracts. Standard form contracts are pre-written agreements used by businesses, where the party receiving the contract typically has little or no power to negotiate or alter its terms. In this context, the party that prepared the contract has often held a dominant position, leaving the other party with limited room for negotiation or modification.

Unfair terms are those that:

1. cause a significant imbalance in the rights and obligations of the parties involved;
2. are not reasonably necessary to protect the legitimate interests of the party benefiting from the term; and
3. would result in financial or other harm to the disadvantaged party if enforced.

These terms have been a cause for concern, as they can lead to imbalanced contractual relationships.

The Upcoming Changes

Starting on November 9, 2023, significant changes to the law on unfair contract terms will be implemented, with the goal of promoting fairness and protecting consumers and small businesses. The key modifications include:

1. Ban on Unfair Contract Terms: The most significant change is that it will be illegal to propose, use, or rely on unfair contract terms in standard form contracts. This means that businesses will no longer be able to incorporate clauses that are unfairly advantageous to them.
2. Penalties for Breaches: Violations of the law’s provisions will be met with penalties. This is a crucial measure to enforce compliance and deter the use of unfair terms. Previously, unfair contract terms would simply be deemed void and unenforceable if a court determined a term to be unfair. The changes mean that a breach of the prohibition could lead to a significant pecuniary penalty, noting that the maximum penalties for breaches of the Competition and Consumer Act 2010 (Cth) were significantly increased in 2022.
3. Determining Standard Form Contracts: The changes provide clearer guidance on identifying standard form contracts. Courts will now consider whether the party that prepared the contract has previously issued similar contracts and how frequently this practice has occurred.
4. Wider Coverage: The small business threshold will be increased, so that businesses will be protected by the new regime if they have fewer than 100 employees or make less than $10 million in annual turnover.

The Implications

These changes have far-reaching implications for consumers and small businesses:

Enhanced Protections: Consumers and small businesses will enjoy greater protection against unfair contract terms. This can help level the playing field and ensure that contractual relationships are fair and equitable.

Transparent and Fair Contracts: The new regulations encourage transparency and fairness in standard form contracts. This is especially crucial for consumers and small businesses that may lack the bargaining power to negotiate terms effectively.

Deterrence: The penalties for breaches will serve as a deterrent, encouraging businesses to avoid incorporating unfair terms in their contracts.

Broadened Coverage: Small businesses will benefit from the expanded scope of coverage. The thresholds for employee count and annual turnover have been increased, ensuring that a more extensive range of small businesses are protected.

Immediate Action

Anyone using standard form contracts should undertake an urgent review of each precedent agreement that they use to engage with consumers or small businesses, to determine whether it is compliant with the new regime, and make any necessary changes.

It is important to note that after 9 November 2023, any standard form contracts entered into, renewed or varied will be caught by the legislation changes.

While there is no definitive list of unfair terms, the following list includes common examples:

• Terms permitting one party to avoid or limit performance of the contract
• A limitation to one party’s liability which is not reciprocated in the other party’s corresponding rights
• Unilateral rights that enable one party to vary the terms of the agreement
• Automatic renewal terms with little or no notice
• An imbalance in termination rights
• Incorporation of separate documents that are not easy to locate or identify

Conclusion

The changes to the law on unfair contract terms, effective from November 9, 2023, mark a significant step toward a fairer and more equitable business environment. By banning unfair terms in standard form contracts, imposing penalties for violations, and providing clearer guidelines for identifying such contracts, these modifications aim to protect the rights and interests of consumers and small businesses. It’s a move towards a more just and balanced contractual landscape, where parties can engage in agreements with confidence, knowing that fairness is at the forefront of legal considerations.