In September 2021 we wrote about proposed reforms to the “unfair contract terms” regime of the Australian Consumer Law. Similar changes have also been made to the ASIC Act in respect of contracts for financial products or services, however those changes are not considered in this article. 

Key Changes 

Following receipt of public submissions in response to an exposure draft Bill, a Bill was introduced to Parliament and ultimately passed by both houses on 27 October 2022. The reforms will come into effect from 10 November 2023. The Bill implements substantial penalties and significantly expands the definition of a small business contract. 

The Bill has expanded the definition of small business contracts and removed the upfront price payable threshold. The new definition includes contracts that are for the supply of goods or services, or for a sale or grant of interest in land where either party is a business that:

• employs fewer than 100 people; or
• had a turnover during their last income year (calculated under the Act) of less than $10 million.

The courts will also receive heightened powers to order injunctions which prevent persons from entering into contracts containing similar terms.

The Bill has also clarified that a contract can be a standard form contract even if:

• there was an opportunity for the parties to negotiate minor or insignificant changes to the contract;
• the party alleging the term was an unfair contract term had the option of selecting the alleged unfair term from a range of options; or
• there was an opportunity for the party alleging the term is an unfair contract term to agree to a different contract or negotiate the terms of a different contract.

Penalties.

Courts are currently able to void unfair contract terms in standard form small business and consumer contracts. However, after 10 November 2023, businesses that make a small business or consumer contract which contains an unfair contract term, or attempt to rely on an unfair contract term in an existing small business or consumer contract are at risk of significant penalties. 

For a body corporate, the maximum penalty will be the greater of:

• $50 million;
• 3 times of value of the benefit obtained by the body corporate; or
• if the value of the benefit cannot be determined, then 30% of the adjusted annual turnover of the body corporate.

For Individuals the new maximum penalty is $2.5 million. 

There are also salient non-financial risks to consider, including:

1. reputational damage;
2. injunctions; and
3. director disqualification. 

Conclusion

It is crucial that before November 2023, businesses undertake a review of their existing standard form contracts being used for small business and consumer clients and adjust any clauses that may give rise to an unfair contract term allegation.

Prior to November 2023, businesses should consider adjusting their contract negotiation process to allow small businesses and consumers a clear opportunity to negotiate the terms of the agreement. Performing high quality due diligence will be crucial to ensure that this specialised negotiation process is capturing small business and consumer customers.

Businesses should keep detailed records of any negotiations with small business and consumer customers that take place as evidence against any unfair contract terms allegations.

For advice regarding commercial contracts or other corporate and commercial legal questions, please contact John or 07 3220 1144.