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Businesses to face penalties for unfair contracts

Businesses to face penalties for unfair contracts

Businesses to face penalties for unfair contracts
WRITTEN BY
Suzie Leask
Suzie Leask
Director

Businesses to face penalties for unfair contracts



After much anticipation and in what will constitute an enormous increase in protection for small business, effectively levelling the commercial contract negotiating ‘playing field’, the draft law reforms to unfair contract laws are finally here, with unfair contract terms soon to become punishable by significant financial penalties.

Additionally, the proposed reforms to the unfair contract laws contained in the Australian Consumer Law will expand the definition of a ‘small business’ contract to businesses with under $10 million turnover or up to 100 employees. This means approximately 99% of businesses will be afforded the unfair contract terms protections.
 
The Bill formally introduces the changes foreshadowed in our previous article, making 2021 a critical year for contract law shake ups and a must review item on the business risk and compliance agenda in order to avoid regulatory scrutiny, prosecution and penalties.

What are the changes?

On 23 August 2021 the Federal Government released the exposure draft legislation: Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Unfair contract term reforms (the Bill) which aims to strengthen existing protections for consumers and small businesses against unfair contract terms.
 
The proposed changes to unfair contract laws include the following:
  • Two new prohibitions against:
    • entering into a standard form contract which contains an unfair contract term
    • applying or relying (or purporting to) on an unfair contract term.
  • Penalties: Courts will be provided with the power to impose significant financial penalties for a contravention of the new prohibitions on proposing, applying or relying on an unfair contract term in a standard form contract:
    • For a body corporate: the greater of $10 million, three times the value of any benefit of the conduct, or if that cannot be determined, 10% of the annual turnover of the party for the previous 12 months.
    • For individuals: Individuals involved in the conduct face a maximum penalty $500,000.
  • Increased ‘small business’ threshold: The changes will expand the application of the laws with the threshold definition of a ‘small business’ increasing from less than 20 employees (currently) to applying to businesses with less than 100 employees or (under an alternative threshold test) an annual turnover of less than $10 million.
  • Additional court powers and remedies: Courts will be able to, on application by ACCC or ASIC (as applicable), make orders to:
    • Impose new unfair terms-specific remedies including orders appropriate to prevent or reduce loss or damage that may be caused by a court declared unfair term, power to make orders to void, vary or refuse to enforce part of or all of a contract.
    • Issue injunctions in circumstances where a standard form contract contains a term deemed by the court to be unfair, including injuncting a person from entering into future contracts that contain the same or similar unfair term.
    • Prevent or reduce loss or damage which may be caused to any person (whether or not party to the proceedings) by a term in an existing contract that is similar to a term that has been declared unfair, whether or not the future or existing contract is identifiable when the Court makes the orders.
    • Public notices and disqualification. Issue public warning notices, adverse publicity orders, and personal orders disqualifying an individual from managing a corporation.
    • A rebuttable presumption. Creating a rebuttable presumption for unfair contract terms that have been found to be unfair that are subsequently included in similar circumstances.
Important note: This ability to make orders with application to similar terms and contracts that are not the subject of the legal proceedings is significant.  This could be used to require a business to amend an unfair term used in its standard form contract across all of its customers, even if only one customer sought the unfair contract term declaration from the court.
  • No contract value threshold: Currently, contracts with an upfront price payable exceeding $300,000, or $1million if more than a 12 month term, are not subject to the unfair contract terms regime.  This price threshold will be removed under the new legislation.
  • ‘Standard form contract’ clarity: Improved clarity around the definition of standard- form contracts, including certainty around factors such as repeat usage of a contract  template, and whether the small business had an effective opportunity to negotiate the contract. 

When will the changes commence?

Submissions on the new draft legislation have closed as of 20 September 2021.

The Exposure Draft Bill proposes that the unfair contract term changes will apply to new or renewed standard form contracts from the date of commencement, being six months after the Bill receives Royal Assent.  ABLA will provide a further update when the commencement date is confirmed, so please ensure you are on our mailing list.

What does this change mean for your business?

  • Businesses should take action now to obtain advice and review their contracts and terms of business to ensure that they are compliant with the proposed changes and remove any ‘unfair contract terms’. The expanded application means that your business might now be affected and there are new significant financial penalties at stake including for individuals, not to mention unwanted regulator attention and reputational damage.
  • ‘Small businesses’ (that fall within the new threshold) should consider the standard form contracts they regularly sign in their commercial dealings and whether the changes can be utilised to obtain increased bargaining power and a fairer deal.  info@ablawyers.com.au for a confidential discussion.
With thanks to Claudia Simmons, Associate, for her assistance with this article.

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