The $50 million dollar reason to check your contract terms…
- The Federal government has implemented new legislative changes to deter unfair and anti-competitive conduct in the Australian market, which ultimately benefits consumers and small businesses.
- As a business owner, it is in your interests to be aware of the recent changes regarding unfair contract terms (UCT) and how they affect your rights and responsibilities.
- The threshold for what falls under the umbrella of ‘small business’ and can receive protection from unfair contract terms, has expanded.
- Big businesses should review and amend their contract terns in any current standard form or consumer contracts, to avoid facing high penalties for unfair contract terms.
- The new legislation imposes significant fines of up to $50 million.
- If you are a small business and have entered into an unfair contract with a big business, you may have rights to get out of the contract or have some of its terms declared void.
- The recent changes will commence on 9 November 2023. However, the maximum penalty changes have already commenced.
What is Australian Consumer Law?
The Australian Consumer Law (ACL), found in Schedule 2 of the Competition and Consumer Act 2010, ensures that businesses conduct fair sales practices. It is a national law covering consumer protection and fair trading.
There have been recent changes to the ACL that affect businesses. The Treasury Laws Amendment (Acquisitions as Consumer- Financial Thresholds) Regulations 2020 (Cth) (Regulation) was introduced, and expanded the definition of ‘consumer’ under the ACL.
The Regulation significantly broadened the scope of the unfair contract terms regime, by expanding the small business threshold and introducing significantly larger penalties. The Regulation increased penalties for all competition and consumer contraventions. Now big businesses are at risk of incurring penalties of more than $50 million for each unfair contract.
Greater protection for small businesses
What constitutes a “small business”?
The definition of small business contracts in section 23(4) has been amended to apply to a business that has either:
- Fewer than 100 employees; or
- An annual turnover of less than $10 million.
The broadening of the definition captures more businesses under this section.
What constitutes an ‘unfair’ contract term?
An ‘unfair’ contract term is one that:
- causes a significant imbalance in the rights and obligations of the parties;
- is not reasonably necessary to protect the legitimate interests of the business; and
- causes detriment to one party if the other party seeks to rely on it.
Other unfair terms include those that enable one party to (and not the other):
- avoid or limit their obligations under the contract;
- terminate the contract
- penalise the other party for breaching or terminating the contract; or
- vary the terms of the contract.
Which contracts do the changes apply to?
Even though consumers can negotiate contracts, the new changes recognise that some consumers and small businesses lack the resources and bargaining power to review and negotiate terms in standard-form contracts effectively. The new regime will apply to:
- contracts parties enter into at or after the commencement date;
- existing contracts renewed at or after the commencement date; and
- terms varied at or after the commencement date.
The new legislation clarifies that a contract may be a ‘standard contract’ form contract despite there being an opportunity for:
- a party to negotiate changes to contract terms that are minor or insubstantial in effect;
- a party to select a term from a range of options determined by another party; and
- a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.
These changes should serve as a strong deterrent message to big businesses that they must comply with their obligations to compete and not mislead or act unconscionably towards consumers.
With the new changes, a body corporate can face fines for each contravention, of (whichever is greater):
- $50 million; or
- 3 times the value of the benefit gained under the contract; or
- If the value of the benefit cannot be determined, then 30% of the adjusted turnover of the business during the breach period.
Individuals can face potential penalties of $2.5 million for each contravention.
The unfair contract changes will commence 9 November 2023. However, the maximum penalty changes have already commenced. In the meantime, big businesses should begin reviewing and amending their consumer and standard form contracts to avoid any risk of being caught under the new regime.
A court may impose a financial penalty where a contract contains an unfair contract term or a person attempts to apply, rely on, or purport to apply or rely on that term. Where a contract has numerous unfair contract terms, each unfair term in the contract may be considered a separate breach.
It is crucial that both small and big businesses ensure their contracts do not contain terms that would infringe upon the unfair contract terms regime under the ACL. If you require assistance in reviewing or amending your contracts, or to discuss these changes, please contact us today on (02) 9189 5288.
Craig Higginbotham and Nicole Sarraf
23 January 2023