A year ago, the Australian Consumer Law (ACL) was amended to introduce eye-watering financial penalties for standard form contracts that are ‘unfair’ to small businesses. Affected providers were given a year to get their contractual house in order. The new laws also brought in guidelines to assist Courts to define what is caught as a ‘standard form’ contract, potentially broadening the regulatory net. As this article discusses, Australian businesses now have a week to review their contracts to ensure compliance or risk significant fines.

Introduction

When the Federal Government promised to improve the rights of small businesses faced with unfair terms in standard forms of agreement (SFOAs), ACCC Chair Gina Cass-Gottlieb hoped for “a stronger incentive for businesses to comply.”[1] The Treasury Laws Amendments (More Competition, Better Prices) Act 2022 (UCT Act) became law on 9 November 2022, ushering in a new era of pecuniary punishments with the potentially to really hurt corporate bottom lines. You can read our initial article on the UCT Act here.

The UCT Act amends the Australian Consumer Law (ACL), which is in Schedule 2 of the Competition and Consumer Act 2010 to introduce penalties of $50 million or more for unfair standard contract terms that will start to apply from 9 November 2023. This date also marks the date that new changes to the law, providing further guidance to the Courts, will come into effect.

What is a SFOA?

General

SFOAs are not specifically defined under the ACL, but are extremely common in the Australia market and often have the following features:

• One party possesses the bargaining power;
• One party prepares the contract without a discussion between the parties;
• The other party must accept or reject the terms on a ‘take it or leave it basis’; or
• The other party does not have adequate opportunity to negotiate the terms of the contract.

SFOAs are often a business necessity, limiting the need to negotiate contract terms with each customer, especially where the relevant business may be dealing in similar transactions of a high volume, low margin and/or low value agreements. However, companies that use standard form contracts need to be aware of the kinds of terms that will soon be punishable with fines of up to $50m or more.

Additional Guidance for Courts

From 9 November 2023, Courts have more guidance on what factors to consider when determining whether a contract is a SFOA.

Primarily, a Court will be able to consider any repeat usage of a given contract as a relevant factor in determining whether a contract is a SFOA. This includes whether the contracting party has made the same (or very similar) contracts before, and, if so, how many times this has been done.

Further, the Court is now under direction to disregard the following factors in determining whether a party was given ample opportunity to negotiate the contract, including:

• whether the party had an opportunity to negotiate changes to terms of the contract that are minor or insubstantial in effect;
• whether the party had opportunity to select a term from a range of options determined by another party; or
• the party that prepared the contract letting a third party negotiate the terms of a different question.

These changes are likely to expand the scope of the UCT Act, meaning that more agreements will be considered SFOA’s, and more business may be found to have unfair terms.

Penalty Powers

Prior to the 2022 amendments, Courts had the power to declare specific terms of a contract “unfair” and therefore void, but the Court had no power to impose penalties. From 9 November 2023, the UCT Act has significant financial penalties for unfair terms, with the maximum being the greater of:

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

ACCC Chair Cass-Gottlieb has referred to these penalties as a way of ensuring that businesses don’t treat the fines as the “cost of doing business” but as a significant sanction to get the attention of business owners and shareholders.

Unfair Contract Terms

Businesses should be aware that from 9 November 2023, the above penalties can apply if a SFOA:

• causes a significant imbalance in the rights and obligations of the parties;
• is not reasonably necessary to protect the legitimate interests of the business; and
• causes detriment to one party if the other party seeks to rely on it.

Of specific concern are terms which may enable one party to unfairly:

• avoid or limit their obligations under the contract;
• terminate the contract;
• penalise the other party for breach or termination; or
• vary the terms of the contract.

Which Australian Businesses are protected?

The UCT Act defines a ‘small business’ as a business with:

• less than 100 employees; or
• an annual turnover of less than $10 million.

Under the ASIC Act, the protections will apply to a ‘small business contract’ if:

• one party to the contract is a small business as detailed above; and
• the upfront price payable does not exceed $5,000,000.

This definition ensures that a greater number of businesses will be protected by the UCT Act, leading to a higher prospects of fines being issued.

With ABS data revealing that over 2.5 million businesses in Australia employ 20 employees or less, at least this number would be protected by the new laws.[2]

Next Steps

Businesses had 12 months from 9 November 2022 to review and amend standard form contracts before the penalties for unfair terms apply on 9 November 2023. The siren will sound in a week, and businesses using standard form agreements will be at risk of major financial penalties if their standard form contract, more broadly defined under the new laws, is unfair to small businesses or individuals.

If you require advice in relation to your standard form contracts, please contact us below.  We can quickly and cost-effectively review your contracts and recommend the minimum changes to be made to enable you to stay on the right side of the new laws.

[1] ‘ACCC welcomes new penalties and expansion of the unfair contract terms laws’ ACCC (Media Release,  1 November 2023) <https://www.accc.gov.au/media-release/accc-welcomes-new-penalties-and-expansion-of-the-unfair-contract-terms-laws#:~:text=The%20Treasury%20Laws%20Amendment%20(More,take%20place%20after%20it%20commences>.

[2] ‘Counts of Australian Businesses, including Entries and Exits’ Australian Bureau of Statistics (Data Release, 22 August 2023) <https://www.abs.gov.au/statistics/economy/business-indicators/counts-australian-businesses-including-entries-and-exits/latest-release>.