2021 is expected to be a big year for Unfair Contract Term laws with major reforms proposed to expand the reach of protections.
The reforms intend to reduce the frequency of Unfair Contract Terms in standard form contracts to promote a more efficient allocation of risk and to improve small business and consumer confidence when entering into standard form contracts.
These changes include:
- Extending Unfair Contract Term laws to cover insurance contracts, such as car insurance, house insurance, travel insurance, and life insurance.
- Making Unfair Contract Terms illegal through the introduction of civil (financial) penalties.
- Providing the court with the power to impose more flexible/appropriate remedies when a contract term is declared unfair.
- Increasing the threshold of ‘small business’ from 20 employees to 100 employees.
- Removing the monetary value threshold to be protected by Unfair Contract Term laws
- Providing clarity around the definition of a Standard Form Contract.
- Creating a presumption that a term is unfair in circumstances where a similar term has been found to be unfair.
Under the current laws, large businesses have little incentive to negotiate contract terms as no penalties currently apply for using Unfair Contract Terms, allowing them to exploit their bargaining power.
Through the introduction of financial penalties and more appropriate remedies, the reforms intend to ensure larger businesses are more accountable and fair in their contract dealings, particularly where there is a negotiating power imbalance between the contracting parties. Stakeholders have identified that simply voiding an unfair contract term does not provide an effective deterrent for large businesses to not use Unfair Contract Terms in their standard form agreements.
The reforms are expected to level the commercial contract negotiation playing field by providing an increase in protection for small businesses, subcontractors, service providers and consumers when negotiating contract terms.
What is an Unfair Contract Term?
Generally, a term of a standard form contract is ‘unfair’ if it:
- Would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- Is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and,
- Would cause detriment (whether financial or otherwise) to a party if it were to be applied/relied on.
What contracts do Unfair Contract Term laws apply to?
The laws do not apply to all contracts. They are limited to standard form contracts which are either small business contracts or consumer contracts. If the contract is not a ‘standard form contract’, Unfair Contract Term protections will not apply.
What is a Standard Form Contract?
A contract is presumed to be in ‘standard form’ unless proven otherwise. Standard form contracts are pre-printed agreements that incorporate non-negotiated terms and conditions set by the contract issuing party. They are offered on a ‘take it or leave it’ basis by large businesses to small businesses who often lack the resources and bargaining power to effectively review and negotiate the contract terms or to challenge their enforcement. For example, a hire agreement or signing up for finance on an appliance or piece of equipment.
If the contract is a Standard Form Contract, the next question is whether it is a Consumer Contract or a Small Business Contract.
What are Consumer Contracts and Small Business Contracts?
A Consumer Contract is a contract for the supply of goods, services and the sale or grant of an interest in land regulated under the Australian Consumer Law. At least one party to the contract must be an individual who acquires the goods or services wholly or predominantly for personal, domestic or household use.
It is important to note that the acquirer must be an individual, not a corporation. Furthermore, consumer contract should not be confused with consumer. The concept of a consumer is irrelevant to Unfair Contract Terms laws, the relevant concept is consumer contract.
- Consumer Contract – party must be an individual; and must acquire good or services for personal, domestic, or household use.
- Consumer – does not need to be an individual; and does not have to acquire goods or services for personal, domestic, or household use.
Small Business Contracts
Currently, a Small Business Contract is a contract where:
- At least one party is a business that employs fewer than 20 people; and
- The upfront price payable under the contract is below $300,000 for a contract of less than one year’s duration and $1 million for a contract that is one year or longer in duration.
How will these changes affect you?
While a majority of the changes have not yet taken effect, the proposed amendments have been agreed to by all State, Territory and Commonwealth fair trading ministers.
The changes to Unfair Contract Terms protections will affect the way your business negotiates contract terms and modifications may be necessary to ensure your business is afforded maximum protection under the new laws and to minimise risk.
What should I do now?
If your business uses standard form contracts it is advisable to review your contract terms to ensure they are compliant and enforceable with the approaching amendments and do not contain any unfair terms.
If you have any questions or concerns regarding your current standard form contract terms or wish to discuss your options, reach out to Morrissey Law + Advisory or your preferred legal advisor to arrange a contract review.
Morrissey Law + Advisory communications are only intended to provide commentary and general information as at the date of publication. They are for reference purposes only, do not constitute legal advice and should not be relied upon as such. Formal legal advice should always be obtained about particular transactions, contracts or matters of interest before taking any action based on this communication. Authors and contributors may not be admitted in all State and Territories.