Unfair Contract Terms

From November 9, changes to the Australian Consumer Law 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. Currently, a Court can only declare specific terms of a contract unfair and therefore void.

“The changes to the unfair contract terms laws should motivate businesses to take steps to ensure their standard form contracts are fair, including by removing or amending concerning terms,” ACCC Deputy Chair Mick Keogh said.

“There was previously little motivation for businesses to comply with the law, despite the ACCC’s compliance and enforcement actions. We strongly urge businesses to review their contracts now to ensure they comply.”

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

“The test for whether a contract term is unfair has not changed. However, businesses now could potentially face substantial penalties for contravening the law. This will better protect consumers and small businesses who have limited bargaining power, expertise, and ability to negotiate or assess standard form contracts,” Mr Keogh said.

“While some of the changes won’t apply to contracts until they are renewed, or a new contract is entered into, businesses should be proactive in reviewing their standard form contracts now.”

TIPS FOR BUSINESSES TO CONSIDER WHEN REVIEWING THEIR CONTRACTS:

Consider both points of view: if you think a term is necessary to protect your business’s legitimate interest, consider the term from the other party’s point of view.

• Include counter-balancing terms: Check that your contract has appropriate counter-balancing terms. For example, if you consider that 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: Don’t have terms that are as broad as possible. Make sure terms are only as broad as reasonably necessary to protect your business’s legitimate interests. •

• Meet your obligations under the Australian Consumer Law: Don’t have terms that seek to avoid your business’s obligations under the Australian Consumer Law. For example, don’t include terms that seek to limit your customers’ consumer guarantees rights, or terms that seek 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 the attention of your customers during the sign-up process, and any renewal process.

The changes will also expand the coverage of the unfair contract term laws to apply to more small business contracts than before. The threshold for small business contracts will increase to apply to small business that employ fewer than 100 persons or have an annual turnover of less than $10 million. Other key changes include the removal of the contract value threshold and clarifying other aspects of the laws, such as more clearly defining ‘standard form contracts’.

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