New Reasons to Keep Your Contract Terms Fair

Substantial changes have been made to the Australian Consumer Law^[1] to ensure standard form contracts contain fair terms that level the playing field for small to medium businesses and significantly increase the number of small business contracts that are captured under the unfair contract term protections. ACCC Deputy Chair Mick Keogh states, “The changes to the unfair contract terms laws should motivate businesses to take steps to ensure their standard form contracts are fair, including by removing or amending concerning terms.”^[2]

Penalties for unfair contract terms

The motivation Mr Keogh refers to is the significant penalties to be imposed upon those seeking to implement unfair contract terms introduced on 9 November 2023. Previously, when a standard form contract was found to have an unfair contract term, the term was void and unenforceable without penalty. These new penalties, at their maximum shown below, are designed to inspire businesses to give full consideration to ensuring the terms are fairly balanced when preparing standard form contracts. 

Maximum fine for corporations

• $50 Million.
• 3 times the value of the benefit received from the unfair term. 
• If the value cannot be determined, 30% of the adjusted turnover during the breach period.

Maximum fine for an individual 

• $2.5 Million.

Who is going to be impacted

Standard form contracts

The regime of protection from unfair contract terms applies to consumer or small business contracts if they are standard form contracts. A contract is deemed to be a standard form contract unless this presumption is rebutted. Demonstrating that a contract is not a standard form contract will depend largely on whether both parties are given an effective opportunity to negotiate the terms, as well as taking consideration of matters such as any power disparities between parties and the number of contracts used in the past that are substantially the same; the latter being a new factor to take into account. Certainly, standard terms and conditions that apply to all customers in the same way, and most template contracts, will be standard form contracts.

Additionally, the new provisions have given the Courts power to determine that a contract is a standard form contract, even when there is an opportunity to negotiate the contract, but the negotiations are limited to small and insignificant terms of the contract. A standard form contract can also be found when one party is given the opportunity to choose from a preset selection of options rather than negotiating a new term. These changes are clearly directed to ensuring that, unless both parties have had a real opportunity to negotiate the terms of a contract, it could be subject to analysis of its terms for fairness. 

Consumer contracts

The meaning of a consumer contract has not been altered and refers to any contract for a supply of goods, services or an interest in land to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption. This obviously captures most contracts with individual end consumers of domestic products.

Small business contracts

Significant changes have been made to the scope of a small business contract. Previously, unfair contract terms protections were only applied to contracts entered into with businesses employing less than 20 persons and where the contract price was for no more than $300,000 or, for a contract spanning a term greater than 12 months, no more than $1,000,000.

Under the new changes, small business contracts will be deemed to be contracts where either party has fewer than 100 employees and has a turnover of less than $10,000,000. These changes aim to substantially increase the number of small business contracts captured under the unfair contract term protections, increasing the risk of fines for hundreds if not thousands of small business contracts. Importantly, they will apply whether the business that has created the contract or the one which it is being imposed upon is within these parameters.

Some exclusions

Even if you have a standard form contract, which is a small business or a consumer contract, there are some terms that are not subject to an unfair contract terms analysis. These include:

• Terms that set out the main subject matter of the contract
• Terms that set the upfront price payable under the contract
• Terms that are required or expressly permitted by law

Also, Constitutions, certain shipping contracts and contracts regarding payment systems used by banks are excluded from the unfair contracts terms regime. Constitutions are, of course, instead subject to compliance with the Corporations Act 2001 (Cth).

What is an unfair contract term?

Any term or provision of a standard form contract which would, should it remain in effect, create a significant imbalance in the rights and obligations of the parties which arise under the contract and result in one party suffering a detriment will be an unfair contract term. However, if a term is included in the contract to reasonably protect a party's legitimate interests, then it will not be considered an unfair term. If there is a legitimate interest requiring protection, such as for management of costs or risk or protection of property, it needs to be proven as being reasonably necessary when balanced against any detriment of the other party.

A good example of this is the case of Turner v MyBudget Pty Limited.^[3] MyBudget’s business involves providing assistance with debt management. In providing these services, MyBudget collected and managed its client’s income and expenses. In carrying this out, MyBudget pooled all its clients’ money into one account and created “virtual accounts” for each customer. MyBudget’s terms provided a discretion for MyBudget to use interest earned on clients’ funds to pay bank fees. Although there was a unilateral power given to MyBudget in the contract, it was seen as protecting a legitimate interest of MyBudget in that its costs of accounting for the interest would likely outweigh the small amounts to be returned to customers. The arrangement of keeping interest and absorbing other costs was seen to be a sensible and reasonable way to deal with this. Consequently, the term was not unfair.

As a general rule, if a term in a contract grants one party unilateral authority to amend, interpret, renew or terminate the contract, there is a high likelihood that the term will be deemed unfair. Similarly, penalty provisions for breach of a contract, unless protection of legitimate interests can be shown, are likely to be seen as unfair contract terms.

This was demonstrated in ACCC v Servcorp Limited^[4] where terms in Servcorp’s ‘base terms’ providing an obligation to pay for services provided by Servcorp at rates determined by Servcorp and giving Servcorp the ability to unilaterally terminate the contract were found to be unfair. These provisions gave Servcorp the ability to unilaterally make decisions impacting both parties and were, therefore, unfair contract terms and void. This meant Servcorp could not rely on those terms, and their customers did not need to abide by them or pay the fees. At the time of this case, no penalties could be imposed on Servcorp, so, at worst, it missed out on receiving the fees for services.

Next steps

It is advisable to review your standard form contracts, as recommended by the ACCC (Businesses urged to remove unfair contract terms ahead of law changes | ACCC). You should consider whether the terms grant one party unilateral powers or are otherwise imbalanced without any legitimate basis. The financial consequences of just having an unfair contract term in a standard form contract, even if it is not sought to be imposed, are significant, and all businesses need to ensure they are fully prepared to avoid such risks.

For more information, you are welcome to watch a recording of a webinar on this topic at: https://www.dwfoxtucker.com.au/event/seminar-the-consequences-of-unfair-contract-terms