Unfair Contract Terms: New Laws from 10 November 2023 and How the Changes will Affect Small and Medium Businesses

From 10 November 2023, changes to legislation mean that standard form contracts with unfair contract terms will be banned. Businesses will also face increased fines and penalties (up to $2.5 million) if they try to use unfair contract terms in their contracts.

Earlier this month, the ACCC released a statement encouraging businesses to review their current standard form contracts and remove or amend any unfair contract terms before 9 November 2023. We write this article to assist you to do so, understand the new requirements and get your businesses ready.

This article focuses on the obligations you now have when dealing with consumers and small businesses. If you are a small or medium business, or deal in consumer contracts, these changes could apply to you. Some estimates states that up to 98% of small businesses will be caught under this legislation.

What is the new legislation?

Unfair contract term legislation in Australia is in the Competition and Consumer Act 2010 and the Australian Securities and Investments Commission Act 2001. These acts aim to protect consumers and small businesses from unfair contract terms. Particularly in relation to standard form contracts.

The legislation itself is not new, but the changes are quite significant. From 10 November 2023 there will be civil penalties (basically fines in layman’s terms) if you breach the unfair contract terms.

What is a Standard Form Contract?

A standard form contract is a standard template contract that is used for all or most of your transactions. They can be a cost effective way of dealing with customers – particularly if your business trades on large volumes of transactions.

The concern, which prompted the new laws, is that these terms are imposed on the customer on a ‘take it or leave it’ basis and are usually drafted to the advantage of the party offering them.

When deciding if a contract is a standard form, a court will consider:

1. if the business that created the contract had all or most of the bargaining power;
2. if the contract was prepared before the parties had a chance to discuss or negotiate;
3. if both parties were able to reject or change terms of the contract or it was on a take it or leave it basis; and
4. if the contract takes into account the circumstance or features of the transaction or parties.

The new laws will make it clear that a contract can be considered standard form even if:

1. the parties can negotiate minor or insignificant terms;
2. the parties selected terms from a range of options; or
3. the same parties properly negotiated on another contract.

What are Unfair Terms?

The test for whether a contract term is unfair has not changed. However, businesses now could potentially face substantial penalties for contravening the law.

Previously, the courts could declare specific terms of a contract unfair and therefore void, but they were not banned. And the Court could not impose any penalties on businesses that included them in standard form contracts.

A contract has unfair terms if it:

1. causes an imbalance in the rights and obligations of the parties;
2. is not necessary to protect the legitimate interests of the party who would get the benefit of the term, and
3. causes harm (financial or otherwise) to a party.

Examples of Unfair Terms

While this is by no means an exhaustive list, some examples of terms that may be unfair, include:-

1. One party being allowed to choose not to perform the contract or limit performance of the contract.
2. One party being permitted to vary the terms or price of the contract without needing the other party’s agreement.
3. One party being allowed to assign the contract to another party to perform, without the agreement of the other party.

ASIC has already started legal proceedings against PayPal Australia Pty Limited (PayPal). ASIC claims that PayPal’s standard form contracts with small business customers contain an unfair contract term.

The case involves a contract term that gives PayPal business account holders 60 days to notify PayPal of any errors or discrepancies in fees that PayPal has charged them, or else accept those fees as accurate.

ASIC is claiming the term is unfair because the effect of the term is to permit PayPal to keep fees it has overcharged or wrongly charged in certain circumstances. That is, if the small business does not notify PayPal of the error within 60 days of the fee appearing in its account statement.

ASIC Deputy Chair Sarah Court said, ‘ASIC has commenced this action to protect the interests of small businesses. We allege this term is unfair because it allows PayPal to escape the consequences of its own errors in overcharging small businesses, and places additional burdens on small businesses to detect and correct charging errors.’

What are the Penalties?

The maximum financial penalties for businesses under the new unfair contract terms law are the greatest of:

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

The maximum penalty for an individual is $2.5 million.

Do the Changes Apply to Me?

As noted above, if you are a small or medium business, or deal in consumer contracts, these changes could apply to you. Some estimates states that up to 98% of small businesses will be caught under this legislation.

The changes apply to:

1. standard form contracts made or renewed on or after 9 November 2023; and
2. a term of a contract that is varied or added on or after 9 November 2023.

Where a term of a contract is varied or added on or after 9 November 2023, the consideration as to whether it is an unfair contract applies to the whole contract, not just the new terms.

The unfair contract terms law does not apply to:

1. terms that are specifically required or permitted by another law;
2. terms that set out the upfront price to be paid;
3. terms that define the main subject matter of the contract;
4. company constitutions; or
5. commercial contracts for the shipping of goods by sea.

Small businesses will be covered by the unfair contract terms protections for any new or varied standard form contract from 9 November 2023 if the business:

1. has 100 or fewer employees, or
2. make less than $10 million in annual turnover.

What Can I Do to Prepare?

To prepare for these changes you should:

1. Consider staff training to educate them of the changes and associated risks.
2. Review your standard or template business contracts.

Do they have unfair terms?

1. Do they need to be re-drafted?
2. Review your standard or template business contracts.Do they have unfair terms?Do they need to be redrafted?
3. Review your business insurance policy.Does the insurer require you to notify them if there are changes to your contracts?
4. Consider legal advice on the effect of these changes will have on your business and how to best prepare.

If you would like to discuss your business contracts, or the effect of these changes for your business, or need help updating your contracts, please contact us on (08) 9389 3999 or [email protected]. We are always happy to have a preliminary telephone or video call at no charge.

This article has been written from the perspective of businesses who use standard form contracts in their day to day operations. In addition, if you have current arrangements with another business that provides goods or services to you and you think those arrangements may be unfair, we would be more than happy to give you advice on where you stand.