It was recently announced by the Federal Treasury that Australia’s unfair contract terms regime would be strengthened to provide increased protection to consumers and small businesses entering into contracts. With strong civil penalties for non-compliance expected, it is important businesses are aware of these changes before it comes into effect later this year.
The current regime
The current system is regulated by Part 2-3 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) which states that a term of a standard form contract will not be enforceable if
it is unfair. This relates to contracts involving either small businesses or consumer contracts.
A consumer contract refers to a situation where at least one party is an individual acquiring goods or services for personal, domestic or household use. For small business contracts, it must involve a small business with 20 or less employees and a contractual value of no more than $300,000 or $1 million if the contract is for more than 12 months.
Under section 25, a term in a standard from consumer or small business contract will be unfair if:
- It would cause a significant imbalance in the parties' rights and obligations arising under the contract;
- It is not reasonably necessary to protect the legitimate interests of the party that would be advantaged by the term; and
- It would cause detriment (either financial or otherwise) to a party if the term were applied or relied on.
Examples of unfair terms include ones which:
- Include unilateral rights to alter the contract without notice;
- Vary the price payable without the other being able to terminate;
- Avoid or limit obligations under a contract;
- Unilaterally determine whether the contract has been breached or determine its
The proposed changes
In an attempt to reduce the prevalence of unfair contractual terms, the new regime provides greater flexibility in remedies and the power to impose civil penalties for non-compliance. The legislation is also expected to provide a definition of a standard form contract to provide greater clarity on what is included and increase eligibility for the threshold to including businesses who can rely on the protections to less than 100 employees rather than 20.
Minimum standards or industry-specific requirements are also expected to be included. The draft legislation is expected in the first half of the year.
The proposed changes are likely to result in significant penalties to businesses who do not comply and will apply to a wide range of agreements such as retail leases, franchise
agreements and finance and supply contracts. In preparation for these changes, businesses relying on standard form contracts will need to review their current contracts to ensure they do not include any unfair terms.
The author of this article is Kym Butler, the Founder and Director of Butlers Business Lawyers.