Written by Peter Waller – Special Counsel – QLS Accredited Specialist – Commercial Litigation at MBA Lawyers
From 9 November 2023, changes to the Australian Consumer Law (ACL) will prohibit businesses from proposing, using, or relying on unfair contract terms (UTC) in standard form contracts with consumers and small businesses. The changes will expand the coverage of the unfair contract term laws to apply to more small business contracts than before.
A Court can declare specific terms of standard form contracts unfair and therefore void. The changes will also allow Courts to impose substantial penalties on businesses and individuals who include unfair terms in their standard form contracts.
In this article, we highlight the upcoming changes and share insights on how your organisation can prepare for them.
What do the laws apply to?
From 9 November 2023, the UCT laws apply when:
- the contract is a “standard form contract”; and
- at least one of the parties is a small business (has 100 or fewer employees, or makes less than $10 million in annual turnover).
In the building industry, the UTC laws could apply to head contracts, subcontracts, consultant agreements, and supplier contracts.The changes bring a significant expansion to the laws by increasing the applicable number of employees (from 20 to 100) and removing the contract value thresholds to which the ACL applies.
The changes will apply to:
- Standard form contracts made or renewed on or after 9 November 2023.
- 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 changes relevant to deciding whether a contract is a standard form contract apply to the whole contract.
What is a standard form contract?
Standard form contracts can provide a cost-effective way for many businesses, including in the building industry, to contract with consumers or other small businesses. However, these contracts may be imposed on a ‘take it or leave it’ basis and are drafted to the advantage of the party offering them.
There is a presumption that a contract is a standard form contract, so the party that prepared the contract must prove that it isn’t.
In deciding what a standard form contract is, a court can also consider any factors it thinks relevant but must consider whether one of the parties to the contract:
- has all or most of the bargaining power in the transaction.
- prepared the contract without or before any discussion between the parties about the transaction.
- could effectively only either accept or reject the terms of the contract as presented.
- was given any real opportunity to negotiate the terms of the contract.
- whether the terms of the contract take into account any specific features of the other party or the transaction.
The change to the law will also make clear that a contract may be a standard form contract despite:
- the other party having an opportunity to negotiate changes to terms of the contract that are minor or insubstantial in effect;
- the other party being able to select a term from a range of options determined by the party that prepared the contract; or
- the party that prepared the contract letting a third party negotiate the terms of a different contract. This means that even if some consumers or small businesses are able to negotiate the terms of a contract that is issued to a broader group of consumers or small businesses, the contract may still be a standard form contract.
What types of terms are or may be unfair?
Under the ACL, contract terms are unfair if they:
- cause a significant imbalance in the rights and obligations of the parties under the contract;
- are not reasonably necessary to protect the legitimate interests of the party who gets an advantage from the term, and
- would cause financial or other harm to the other party if enforced.
In deciding whether a term is unfair, a court can consider any matters it thinks relevant, but it must consider the contract as a whole and whether the term is transparent.
While the ACL laws have not yet been clearly applied in court to construction industry contracts and terms, the following types of clauses have been the focus of the regulatory bodies in other industries:
- terms that allow one party (but not the other) to avoid or limit their responsibilities under the contract;
- terms that allow one party to limit its liability to exclude statutory consumer rights;
- terms that allow one party (but not the other) to end the contract;
- terms that allow one party (but not the other) to charge early termination fees (including break fees that are not a genuine estimate of such losses);
- terms that penalise one party (but not the other) for breaching or ending the contract;
- terms that allow one party (but not the other) to change the terms of the contract (unilateral variation terms) including prices or charges;
- terms that allow automatic renewals;
- terms that allow one party (but not the other) to limit or exclude liability on the basis that the other agrees it has read outside documents not provided by the party and excluding liability for other pre-contractual representations.
Other terms that are regularly seen in contracts in the construction industry that could be examined for being unfair include extensive time bars, unilateral rights to security, termination for convenience terms, proportionate liability exclusion terms, and assignment terms to the detriment of only one party without their consent.
What is the effect of having an unfair contract term?
If a court decides that a term is unfair, it will be ‘ void’. This means it will no longer apply to the parties to the contract. If the rest of the contract can continue without that term, then the rest of the contract will continue to apply to the parties.
A court can also grant an injunction with respect to the unfair contract term, declare the whole or any part of the contract void, unenforceable or to be varied, and change other existing contracts which have a similar term.
The changes will allow Courts to impose substantial penalties on businesses and individuals who include unfair terms in their standard form contracts. The maximum financial penalties for businesses under the new unfair contract terms law are the greatest of:
- 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 percent of adjusted turnover during the breach period.
The maximum penalty for an individual is $2.5 million.
Have you reviewed your contracts?
Businesses are encouraged to review their standard form contracts and remove or amend any unfair contract terms before new penalties take effect.
When the UCT law changes take effect in November, businesses in the construction industry using standard form contracts may face significantly elevated risks. The new laws expand the scope of the UCT laws and introduce substantial penalties and enforcement measures for non-compliance. It is important for businesses to take proactive steps now by reviewing all their standard form contracts to ensure compliance before the impending changes.
Businesses should consider:
- whether a contract is a ‘standard form contract,’ taking into account the factors outlined by the ACL;
- whether the contract will be used with consumers or businesses with fewer than 100 employees or having an annual turnover of less than $10 million; and
- examining the contract for any potentially unfair contract terms.
For more information, get in touch with Peter Waller by calling 075539 9688 or email firstname.lastname@example.org
Peter Waller, Special Counsel – QLS Accredited Specialist – Commercial Litigation
Please note that the provided information is a general guideline, and specific legal advice should be sought for each individual case.