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Businesses to face penalties for unfair contracts

Businesses to face penalties for unfair contracts

Published: 22 Nov 2020

Businesses to face penalties for unfair contracts

Businesses to face penalties for unfair contracts

Published: 22 Nov 2020

In what will constitute an enormous increase in protection for small business, subcontractors and service providers, effectively levelling the commercial contract negotiating ‘playing field’, Assistant Treasurer the Hon Michael Sukkar MP has recently announced that unfair contract terms will become illegal and punishable by civil penalties.  Additionally, the proposed reforms to the unfair contract laws contained in the Australian Consumer Law will expand the definition of ‘small business’ contract to businesses with under $100 million turnover or up to 100 employees.  This means 99% of businesses will be afforded the unfair contract terms protections. 

Evidence suggests that unfair contract terms continue to be highly prevalent in standard form contracts, with the proposed new civil penalties following a major crackdown and campaign by the Australian Competition and Consumer Commission (ACCC) and the Small Business Ombudsman to make larger businesses more accountable and ensure they are fair and even-handed in their contract dealings, particularly where there is a negotiating power imbalance. The changes will aim to address the problems with the existing regime in which small businesses are often reluctant to pursue litigation or raise unfair contract terms in negotiations in fear of damaging commercial relationships, while big business currently has little incentive to review or negotiation on unfair contract terms as no financial penalties are currently available.

A prohibition on unfair contract terms was also supported in the Digital Platforms Inquiry Final Report (Recommendation 20) and as ACCC Chair Rod Sims recently told the National Press Club: 
Why change your unfair contract terms if you can get the benefit of them until the ACCC calls... Making unfair contract terms illegal and subject to penalties would be an enormous boost to small business.

These amendments, combined with the recently announced changes to broaden the application of Australian Consumer Laws to more business contracts by increasing the consumer guarantee threshold from $40,000 to $100,000 (see our recent article), will make 2021 a critical year for contract law shake ups and a must review item on the business compliance agenda in order to avoid regulator scrutiny. 

Unfair Contract Laws Refresher

Currently, the unfair contract laws protect consumers and, since 2016, also small businesses, who are party to ‘standard form contracts’ where:

  • the contract is for the supply of goods or services;
  • at least one party is a small business (ie. employs less than 20 people including casual employees employed on a regular and systematic basis); and
  • the upfront price payable under the contract is no more than $300,000 or $1million if the contract is for more than 12 months.

'Standard form contracts' are generally contracts prepared by one party who has all or most of the bargaining power and which are presented on a 'take it or leave it' basis with little or no opportunity for negotiation.  

When is a term in your business contract ‘unfair’?

A term will be considered unfair, having regard to the contract as a whole, where:

  1. (significant imbalance) it causes a significant imbalance in the parties' rights and obligations under the contract;
  2. (not reasonably necessary) it is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
  3. (detriment) it would cause detriment (financial or otherwise) to a party if it were relied upon.

What are the changes?

Although the draft legislation is yet to be released (and the timing yet to be confirmed), the Joint Communique from the Meeting of Ministers for Consumer Affairs at the ANZ Legislative and Governance Forum on Consumer Affairs provides detail of the proposed amendments and notes the changes are intended to: ‘reduce the prevalence of UCTs in standard form contracts, providing a fairer and more efficient allocation of risk in these contracts, and will improve consumer and small business confidence when entering into standard form contracts.’ 

The proposed changes to unfair contract laws include the following: 

  • Unlawful and penalties: Unfair contract terms will become unlawful and courts will have the power to impose a civil (financial) penalty.
  • More flexible remedies: Courts will have more flexible remedies available when it declares a contract term unfair.  Rather than the term automatically being ‘void’ (under current laws), courts will now be able to determine an ‘appropriate remedy’. Further, the change will clarify that the remedies available for “non-party consumers” will also apply to “non-party small businesses” and will create a rebuttable presumption provision for unfair contract terms used in similar circumstances. 
  • Increased ‘small business’ threshold: The changes will expand the application of the laws with the threshold definition of a ‘small business’ increasing from less than 20 employees (currently) to applying to businesses with less than 100 employees or (under an alternative threshold test) an annual turnover of less than $10 million.  As noted above, this will mean 99% of businesses in Australia will be covered by the new unfair contract laws.  
  • No contract price threshold: The current requirement for the upfront contract price to be below a certain threshold (see above) in order to be covered by the unfair contract term protections will be removed.
  • ‘Standard form contract’ clarity: Improved clarity around the definition of standard-form contracts, including certainty around factors such as repeat usage of a contract template, and whether the small business had an effective opportunity to negotiate the contract.
  • Rebuttable presumption: Introducing a rebuttable presumption for unfair contract terms used in similar circumstances (eg. if the same or substantially similar term has been used by the same entity or in the same industry, and has already been declared ‘unfair’).
  • Exemptions: Provisions for certain clauses including ‘minimum standards’ or industry specific requirements in relevant Commonwealth, state or territory legislation to be exempt from the protections. 

What does this change mean for your business? 

Although the Federal Government has not yet confirmed the proposed amount of civil penalties that will apply under the new laws, we expect, in line with the ACCC’s views, that it will likely have reference to the penalties currently available under the Competition and Consumer Act 2010 (Cth) for other unfair practices (such as unconscionable conduct, making false or misleading representations).  Currently, the maximum penalties available under those laws are the greater of $10million, three times the value of the benefit obtained or 10% of the annual turnover of the business (and $500,000 for individuals). 

Now more than ever, it is crucial that businesses take stock of lessons learnt in 2020 and review your contracts and terms of business to ensure that they are compliant and enforceable, and where possible avoid regulator scrutiny.  In the context of the uncertainty of a global pandemic now is the time to proactively ensure your contracts are putting you in the best position possible by providing you with the maximum protection and flexibility your business requires, while also getting on top of Australian Consumer Law and unfair contract protections that will likely change how you negotiate contracts going forward. 

With thanks to Claudia Simmons, Associate, for her assistance with this article.

Related resources: 

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