New unfair contract term ban and $50 million penalties now in effect

Legislation imposing significant penalties on individuals and organisations for using unfair terms in standard-forms contracts has come into effect.

Australian companies previously had eight weeks to strip unfair contract terms from the standard form contracts they offer to small business suppliers or run the risk of ramped-up financial penalties handed down by the courts.

The Australian Competition and Consumer Commission (ACCC) had reminded companies that updated legislation, designed to protect small businesses and consumers from lopsided and detrimental business arrangements, will come into effect on November 9.

The legislation, which passed into law late last year, will impose dramatic maximum penalties on organisations using unfair terms in standard-form contracts.

Currently, Australian courts have the power to determine if contract terms are unfair, and, if so, render those terms void.

But from November 9, the courts will be free to impose significant penalties.

The maximum penalty imposed on businesses found to have used unfair contract terms in standard form contracts will be the greatest of $50 million, three times the financial benefit gained from the unfair conduct, or 30% of company turnover earned during the breach period.

For individuals, maximum penalties will reach $2.5 million.

“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,” said ACCC deputy chair Mick Keogh.

At the same time, the threshold for small businesses covered by unfair contract protections will expand.

From November 9, the rules will cover businesses that have 100 or fewer employees, or make less than $10 million in annual turnover.

“Take it or leave it” contracts face new scrutiny

Standard form contracts are most commonly used by major companies which deal with many suppliers or customers, instead of customising each and every contract on offer.

These boilerplate contracts are often offered on a “take it or leave it” basis, the ACCC says, with the small business unable to vary any, or all, of the contract.

Contract terms could be unfair if they:

• Cause a significant imbalance between the rights of parties as a result of the contract,
• Are not reasonably necessary to protect the rights of a party that would benefit from the term,
• Could cause detriment to a party to the contract if the terms were applied or relied on.

Specifically, potentially unfair contract terms can include:

• Terms giving one party the right to vary the price payable, without offering the other party a chance to terminate the contract,
• Terms that allow one party (but not the other party) to unilaterally cancel, change, renew, or decide not to renew the contract,
• Terms allowing one party to unilaterally change the kind of good or service to be offered under the contract,
• Terms allowing one party to determine if a contract has been breached, among other terms.

The changes will cover standard form contracts made or renewed on or after November 9, along with specific contract terms that are varied or added past that date.