Significant changes to Unfair Contract Terms

There exists a regime within Australia that protects consumers and small businesses from unfair terms in 'standard form' contracts, irrespective of the express wording contained in those contracts.Prior to Christmas, new laws were passed that overhauled the existing unfair contract term regime. These new laws have broader application to small businesses and increased monetary penalties for persons that breach these laws.

‍What sort of contracts do the laws apply to?

‍The laws only apply to 'standard form' consumer or business contracts. A standard form contract is where one party uses a set of standard terms and conditions, that is repeatedly issued to multiple people. In a standard form contract, the consumer tends to have little to no input on the terms of the contract. Examples include, cell phone service agreements, software licensing agreements or a gym membership applications.

A term within one of these contracts will be unfair if:

1. it results in a significant imbalance in the parties' rights and obligations;
2. is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
3. it would cause detriment to a party if it were to be relied on.

An example of an unfair contract term may include enabling a supplier to unilaterally increase the price without enabling the consumer to terminate or cancel the agreement in that circumstance.

‍Unfair terms could exist in any type of consumer or small business contract.

‍A key change within the new law is the significant expansion of the definition of 'small business'. The amendments will recognise any businesses as a small business if it meets any of the following criteria:

1. it has fewer than 100 employees, as opposed to the current law, which confines applications to entities with fewer than 20 employees;
2. an annual turnover of not more than $10 million; and
3. any contracts relating to financial products and services under $5 million that are regulated under the ASIC Act will be included rather than the current $1 million cap.

These criteria suggest much larger businesses than the colloquial 'small business' will be captured by these laws.

‍Why is this significant for Australian businesses?

‍Businesses that did not fit in the classification of small businesses under the current regime are more likely to fall under the purview of the new legislation having regard to the revised definition set out above.

It is important that businesses regularly take steps to review their standard form contracts with other small businesses, to ensure that any unfair contract terms are excluded. Small businesses should also review the standard form contracts offered by suppliers to note or challenge any terms that may be construed as unfair.

‍If you require assistance in relation to any of the information provided above, our team can provide advice to you and your business to minimise any future risk. Contact us today by emailing hello@pragma.law or call us on (08) 6188 3340.