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New penalties and enhanced remedies to address unfair
contract terms. Parties have until 9 November to review and if
necessary, amend their contracts and avoid exposure to costs,
penalties and losing control of their contract terms.
Introd uction
For some time, concerns have been expressed as to the
insufficiency of deterrence to companies and individuals who are
using prohibited unfair contract terms in contracts with
potentially vulnerable people and small businesses. In response,
the Commonwealth Government has passed the Treasury Laws
Amendment (More Competition, Better Prices) Act 2022
(Act).
The Act amends the Australian Consumer Law
(ACL), which forms a part of the Competition
and Consumer Act 2010 (CCA). The ACL will
enforce a penalty regime for imposing unfair contract terms in
standard form and small business contracts. The Act has also
increased the penalties applicable to the established breaches of
the CCA and ACL such as false or misleading representations,
coercion, unconscionable conduct, supplying products that do not
comply with established standards, and harassment.
Standard form contracts are a set of repeatedly and commonly
used terms and conditions, often used by companies including
builders, developers and head contractors, amongst others, as a
cost effective option when conducting business to avoid the cost of
negotiating contracts. They are many and varied. These contracts
are completed by one party and are often simply signed by the
other, without any option to negotiate the terms of the
contracts.
A small business contract is any contract where one party has
less than 100 employees or less than $10 million turnover in their
last income year, thus including the vast majority of
subcontractors and suppliers.
Consumers, vulnerable individuals and small businesses often
lack the resources, bargaining power and perhaps the patience, to
effectively review and negotiate terms of such contracts. The Act
aims to narrow the negotiating power gap and exposes companies or
individuals who have taken advantage of unfair contract terms and
have been tardy in amending their standard form contracts to
address the mischief.
The increased penalties for breaches of the CCA and ACL came
into effect on 10 November 2022 and are applicable
to breaches after that date. The key sections of the CCA, regarding
penalties for unfair contract terms, will commence on 9
November 2023 and will apply to all standard form and
small contracts regardless of when they were entered into.
This provides a 12 month respite for parties to review, obtain
advice on and, if necessary, amend their standard form and small
business contracts so as to avoid breaches of the revised
legislation.
What is an Unfair Contract Term?
Unfair contract terms for the purposes of the ACL are typically
those that cause an unreasonable or unnecessary imbalance between
the parties’ rights and obligations under the contract. This
may include clauses which are not reasonably necessary to protect
one party’s legitimate interests and would otherwise cause
financial, or other, detriment to the other party if it were relied
upon.
In simplest form, an unfair contract term allows one party to do
something whilst the other party is unreasonably or unnecessarily
prevented from doing the same. For example, one party is permitted
to terminate, amend, or renew the contract whilst the other is
not.
It should be noted that unfair contract terms have always been
prohibited and that the amendments do not change the definitions or
considerations of defining unfair contractual terms, they go to
their application and consequences. Accordingly the Court’s
interpretations of unfair contractual terms remain relevant.
Terms which the courts have previously considered to be unfair
include those which:
- give rise to an imbalance between the parties rights and
obligations; - are not necessary to protect any one parties legitimate
interests in a contract or project; - could cause significant financial or other detriment to a
consumer or small business owner (or simply the other party); - allow one party but not the other to limit the performance
required under the contract; - allow one party but not the other to terminate;
- penalise one party but not the other for breaches of the
contract; - allow one party but not the other to renew the contract;
- allow one party to vary the contract prior with the other party
having a right to terminate for breach; - allow one party to vary the price or goods or services without
the other parties’ consent; - allow the contract to be renewed automatically without notice
to a customer/the other party; - allow one party to terminate on a wide range of reasons and
which may have significantly adverse consequences for the other
party; - include unreasonable restrictions on enforcement (i.e. only
through arbitration in a foreign jurisdiction); and - offer broad indemnities or exclusions of all liability.
Increased Maximum Penalties
Most companies, regardless of size, as well as business minded
individuals will be aware that breaches of the CCA and ACL through
anti-competitive behaviour already carry penalties. As stated
above, penalties will also (from November 2023) be applicable to
unfair contract terms where previously the applicable sanctions
were limited to court orders that the particular unfair clause was
void and unenforceable.
Accordingly, companies and individuals who once may have
considered exposure to sanctions for unfair terms as simply a
contractual risk will now be exposed to severe maximum
penalties:
| Party | New Maximum Penalties |
| Corporations | The greater of:
– $50 million;
– Three times the value of the benefit obtained from the
Where the value of the benefit cannot be determined,
|
| Individuals | $2.5 million |
The maximum penalties apply to a number of offences and civil
penalty provisions under the ACL as well as the CCA, such as cartel
offences, prohibited conduct in energy market provisions and
mandatory bargaining provisions. Importantly, the maximum penalties
will also apply to unfair contract terms if those contract terms
continue to be relied on after 9 November
2023.
Other remedies
Whilst the courts have had the power to void, amend, or refuse
to enforce part, or the entirety, of the contract to the extent
required to address the loss, wrong, or damage that was suffered by
the a wronged party to the contract, this provision now further
extends to likely loss or damage that
could be caused. This means the court will take into consideration
not only whether the term has caused
damage but also if it has the potential
to cause damage, and deem the term unfair accordingly. The
amendments make the prohibitions prospective.
Importantly, should it now be found that a particularly unfair
clause/s is used across a business’s standard form or small
business contracts, then the court may order that
all of the other contracts subject of the
mischief also be void, amended, or that the particular clause may
not be enforced across some or all such contracts.
Upon a particular clause being deemed to be unfair, the court
may also injunct a party from including similar unfair terms in
future standard or small business contracts. The court may also
disqualify a person from managing a corporation based on their
history of unfair contract terms.
These additional remedies pose a serious risk to
head-contractors and developers alike, including on larger projects
where standard form contracts may be used with dozens of separate
subcontractors.
Who may bring an action?
Any individuals or small business may bring civil actions
against companies or individuals for using unfair contract terms in
their standard form or small business contracts. If successful in
the action, being that a particular term is deemed unfair, then the
court may not only award the wronged party with compensation but
may also apply one of the remedies or penalties outlined above
against the company or individual relying on the unfair contract
term.
Additionally, such civil actions may prompt the Australian
Competition & Consumer Commission (ACCC) to
undertake further investigations into the breaching party’s
business activities, including for breaches of the ACL and CCA that
were not related to the initial civil suit, leading to subsequent
civil or criminal actions against the company or individual for the
said breaches.
Who is at risk?
Industries of all nature of contracting are exposed. In the
construction and infrastructure context, developers,
head-contractors, service companies and other companies or
individuals who work on large development projects, or projects
that simply involve multiple parties, are particularly exposed to
the new unfair contract term remedies. If one disgruntled
subcontractor is successful in convincing a court that a term in
their standard form contract is unfair, the Court may be minded to
do the same across all the standard form contracts used and expose
the entire project to ruin.
Call to action
Whilst standard form contracts are usually an effective way for
reducing the costs of documenting transactions, companies and
individuals can no longer be complacent in the context of outdated
and unfair terms as the increases to penalties, and the additional
remedies now available to courts, are too significant to
ignore.
Given the potential consequences those using who use standard
form or small business contracts are encouraged to review their
contracts for unfair contract terms. To avoid exposure to the
enhanced consequences, terms which could be considered unfair
should be either removed or amended before 9 November 2023.
If you are unclear on whether your standard form or small
business contracts include unfair contract terms, the team at Piper
Alderman are ready to assist.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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