Businesses are encouraged to review their standard form contracts and remove or amend any unfair contract terms before new penalties take effect.

From 9 November 2023, changes to the Australian Consumer Law (ACL) will prohibit businesses from proposing, using, or relying on unfair contract terms in standard form contracts with consumers and small businesses.

The changes will allow courts to impose substantial penalties on businesses and individuals who include unfair terms in their standard form contracts.

The test for whether a contract term is unfair has not changed.

Contract terms are unfair if they:

• cause a significant imbalance in the rights and obligations of the parties under the contract
• are not reasonably necessary to protect the legitimate interests of the party who gets an advantage from the term, and
• would cause financial or other detriment to the other party if enforced.

The threshold for small business protection has increased to now cover small businesses that employ 100 or fewer persons, or have an annual turnover of less than $10 million.

Standard form contracts

Standard form contracts provide a cost-effective way for many businesses to contract with a significant volume of customers. However, these contracts are largely imposed on a ‘take it or leave it’ basis and can often be drafted to the advantage of the party offering them.

If a party to proceedings alleges that a contract is a standard form contract, it is presumed to be standard form unless another party to the proceedings proves otherwise.

A court may determine a contract to be a ‘standard form contract’ despite there having been  an opportunity for a party to negotiate minor changes.

The  changes to the ACL will apply to:

• standard form contracts made or renewed on or after 9 November 2023
• a contract term that is varied or added on or after 9 November 2023. However, where a term of a contract is varied or added on or after 9 November 2023, the changes relevant to determining whether a contract is a standard form contract apply to the whole contract.

Advice for businesses

When reviewing contracts:

• Consider both points of view. If you think a term is necessary to protect your legitimate business interest, consider the term from the customer’s point of view.
• Include counter-balancing terms. Check that your contract has appropriate counter-balancing terms. For example - if you consider your business reasonably needs the ability to unilaterally change the product or service being provided under the contract, does the contract also allow your customers to exit the contract without penalty when this occurs?
• Avoid broad terms. Make sure terms are only as broad as reasonably necessary to protect the legitimate interests of your business.
• Meet your obligations under the law. Don’t have terms that seek to avoid your business’s obligations under the ACL. For example - don’t include terms that seek to limit your customers’ consumer guarantees rights, or to disclaim any representations your business may have made outside of the contract.
• Be clear. Use clear and simple language in your contracts.
• Be transparent. Ensure key terms are clearly drawn to your customers’ attention   during the sign-up process and any renewal process.

Businesses may wish to obtain independent legal advice if they have questions about how the law applies in their specific situation. If there is doubt as to whether a contract term would be considered unfair, businesses should consider removing or changing the term.

Maximum penalties

The maximum financial penalties for businesses under the new unfair contract terms law are the greatest of:

• $50 million;
• three times the value of the ‘reasonably attributable’ benefit obtained from the conduct, if the court can determine this; or
• if a court cannot determine the benefit, 30% of adjusted turnover during the breach period.

The maximum penalty for an individual is $2.5 million.