Monday 31 October 2022

The $50 Million Dollar Reason to Review Your Contracts

The $50 Million Dollar Reason to Review Your Contracts

As a business owner, you must be aware of the recent changes regarding unfair contract terms (UCT) and how it affects your rights and responsibilities. The Federal Government warned of changes to the Australian market, and now those changes have come into effect. For instance, The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (the Bill) has now become law following Royal Assent on the 9th of November this year.

The Bill amends the Competition and Consumer Act 2010 (Cth) (CCA), the Australian Consumer Law (ACL) and the Australian Securities and Investment Act 2001 (ASIC Act). Furthermore, it significantly broadens the scope of the unfair contract terms regime by expanding the small business threshold and introducing serious penalties. Additionally, it increases penalties for all competition and consumer law contraventions. Indeed, this includes potential penalties of $50 million for a body corporate and $2.5 million for individuals.

This article outlines the proposed changes, their implications, and how they will affect your rights and responsibilities in your commercial contracts.  

What Makes a Contract Term Unfair?

The definition of an unfair contract term remains unchanged. As a reminder, a contract term will be ‘unfair’ if it:

  • 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.

Further, this may include terms that enable one party (and not the other) to:

What is a Standard Form Contract?

The  ACL does not specifically define ‘standard form’. However, it does provide a framework of factors for courts to consider when determining whether a standard form contract exists. These factors include where: 

  • one party possesses the bargaining power;
  • one party prepares the contract without a discussion between the parties;
  • the other party must accept or reject terms on a ‘take it or leave it basis’; or
  • the other party does not have an adequate opportunity to negotiate the terms of the contract.

Additionally, some recognisable examples of standard form contracts include:

  • mobile phone plans;
  • airline sales terms and conditions;
  • gym memberships;
  • information technology licences; and
  • online contracts where the party is required to tick an acceptance box to accept terms and conditions.

Does it Apply To Me?

Under the Bill, the UCT protections will apply to a small business contract if one party is a business that: 

  • employs fewer than 100 people; or 
  • has a turnover for the last income year of less than $10,000,000. 

Under the ASIC Act, the protections will apply to a small business contract if:

  • the upfront price payable does not exceed $5,000,000; and
  • one party to the contract employs fewer than 100 people; or
  • has a turnover for the last income year of less than $10,000,000.

Even though consumers can negotiate contracts, the new changes recognise that consumers and small businesses often lack the resources and bargaining power to review and negotiate terms in standard-form contracts effectively. Therefore, the ability to negotiate minor or insubstantial changes will not negate the protections afforded to consumers with these legislative changes.

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.

Buying a Business: Guide to Negotiating Terms

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When Do I Need to Make Changes to My Contracts? 

Businesses impacted by these changes should begin reviewing and amending their consumer and standard form contracts immediately. While the unfair contract term changes will only come into effect 12 months after Royal Assent, the new maximum penalties are in force as of the day after the Bill received Royal Assent.

Key Takeaways

In summary, 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. Indeed, UCTs are now considered unlawful.

Furthermore, the threshold for what falls under the umbrella of ‘small business’, and can receive protection from UCTS, has expanded. Therefore, you should amend or remove UCTs from any current standard form or consumer contract. Moreover, the implication of penalties has heightened the consequences of having (and relying on) unfair contract terms. Additionally, businesses must be vigilant to ensure their contractual arrangements are fair and balanced.

If you need help amending your standard form contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

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