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Amendments to legislation commencing on 9th November 2023 will impact standard form contracts and small businesses. If you’re a small business, then keeping up with Australian Consumer Law (ACL) and the Australian Securities and Investments Commission (ASIC) is crucial in order to ensure compliance. Understanding what these changes are and how they will affect your business is essential, as their consequences result in heavy legal penalties that are set to be introduced soon.
Don’t worry though, we’ve got you covered. Let’s take a closer look at what you need to know.
What Are The Legislation Changes Happening With Unfair Contract Terms In November 2023?
The ACL and the Australian Securities and Investments Commission Act 2001 are being amended. The legislation will now take a broader range of matters into consideration when determining whether a contract is a standard form contract or not.
So, what does this mean for the law?
All standard form contracts are covered by a set of rules regulated by the Australian Competition and Consumer Commission (ACCC) that have to do with unfair contract terms. Due to the changes in the law, more contracts will be held by these regulations.
What Are Standard Form Contracts?
You might be wondering, what are standard form contracts anyways?
It’s important to know exactly what a standard form contract is. That way you’ll know how much these changes are going to affect your business.
A standard form contract is a pre-written legal document that is used for all signees. Usually, most or all terms of that contract cannot be changed. You’ve likely dealt with a standard form contract at least once in your life. Signing a gym membership, employment contracts and even terms and conditions can all be considered a standard form contract. These contracts aren’t illegal and they are in fact, a great way to make things more efficient and consistent.
However, as the other party doesn’t get to decide on the terms of the contract, standard form contracts are held to a particular legal quality.
How Are Standard Form Contracts Being Impacted By The Legislation Amendments?
Prior to the amendments, courts took the following matters into consideration when deciding if a contract was standard form or not:
- If one party posses all or most of the bargaining power in the transaction
- If the terms of the contract could be accepted or rejected upon presentation
- Whether there was any discussion between the parties prior to the contact being prepared
- If the contract has any specific considerations or allowances for the other party
- If the other party was given any real opportunity for negotiation
Now, courts will have the freedom and discretion to consider any factors they think are relevant, along with the ones we listed above when determining whether a contract is a standard form contract.
The amendments have also clarified that even if a contract did give a window for negotiation, or allows a selection from a range of options, it can still be considered a standard form contract. Moreover, if the party that set the contract lets a third party negotiate the terms of a different contract, the contract the signing party agreed to could still be considered a standard form contract.
So, these changes mean there’s going to be a much broader range of contracts that need to adhere to unfair contract terms regulations, set out by the ACCC.
What Exactly Are Unfair Contract Terms?
Certain types of terms can be regarded as unfair contract terms. It’s illegal to have these terms in standard form contracts.
Generally, something will be considered to be an unfair contract term if it:
- Cannot be considered reasonably necessary in protecting the interests of the parties to the contract
- They cause a significant power imbalance between the parties to the contract
- An enforcement of the terms of the contract, would cause harm to the party it’s being enforced against
Courts will often look at clauses in a contract that deal with breaches, obligations, penalties and termination to determine if the terms are unfair.
Keep in mind, there are some instances where the regulations around unfair contract terms may not be applicable. Talk to one of our Legal Experts today if you want to know more or have any questions.
What Do The Changes Mean For My Small Business?
According to the ACCC, small businesses can consider themselves protected from unfair contract terms that are found in standard form contracts. The recent amendment will also broaden the definition of a small business.
According to the new regulations, a business will be considered small if they:
- Have 100 employees or less
- Acquire an annual turnover of less than $10 million
From 9th November 2023, the changes to the legislation will cover any new standard form contracts (or old ones that have been altered) that impact small businesses falling under the threshold we listed above.
What Happens If A Contract Is Found To Have Unfair Terms?
When a court decides that a contract contains unfair terms, it will be considered void. That means, the term will no longer be enforceable. If the contract can continue without the unfair contract term, then that section of the contract will simply be declared as void. However, the rest of the contract can continue to function.
On the other hand, if the court finds the unfair term was central to the contract and without it, the contract cannot hold up, then the entire contract will be cancelled.
Along with declaring contracts and parts of contracts void, courts can also impose fines and penalties if unfair contract terms are found. Previously, courts were not able to impose penalties, even if a contract was declared void for using unfair contract terms- so this is a major development.
The heftiness of fines have also dramatically increased. In 2022, a bill was passed that increased the financial penalties for breach of unfair contract term laws. Currently, financial penalties for companies using standard form contracts with unfair terms include:
- A penalty to the greater of $50 million (formerly $10 million) or
- 3x the value of the breach
- If the value of the breach can’t be determined, then 30% of the companies turnover during the time they were engaged in the breach
If an individual has been found to use unfair contract terms, their penalties can be up to $2.5 million (formerly $500,000).
The penalties have been increased primarily to deter bigger companies from taking advantage of small businesses. Nevertheless, It’s important for all business owners to be aware of both their rights and responsibilities in light of these changes.
What Action Do I Need To Take?
As a small business owner, you might be both a signee or the provider of a contract. No matter what side of a contract you fall on, this is a good time to get your Contracts Reviewed. Our legal experts are happy to comb through any contracts you have to make sure they are legally compliant with the recent amendments.
Remember, breaching the ACL can lead to heavy fines and penalties, plus it can be very detrimental to your business’s reputation. If you have any questions regarding your business’s compliance, then it’s best to talk to a Specialist Consumer Lawyer.
Consumer law can be a lot to take in, plus there’s a lot of middle ground and room for interpretation. If you’re feeling unsure about something, acting now to ensure you’re complying with consumer laws can save you a major headache down the line! Get in touch with us about an Australian Consumer Law Consultation to know more.
Next Steps
The recent changes regarding unfair contract term laws may impact your business in a large way or it might just have a minor effect on your day to day activities. Either way, it’s a good time to review your contracts and check up on your ACL compliance measures, as mistakes can happen by anyone. Don’t hesitate to seek the advice of a Legal Expert and get your business the right kind of help.
Here’s a quick summary on what we’ve discussed:
Key Definitions
- Unfair contract terms: Terms that are not reasonably necessary to protect parties’ interests, create a significant power imbalance, or cause harm when enforced
- Standard form contracts: Pre-written legal documents with fixed terms. These are regulated by the ACCC to prevent unfair contract terms
Key Changes
- From 9 November 2023, amendments to the ACL and the ASIC Act 2001 will affect standard form contracts and small businesses in Australia
- These changes will broaden the criteria for determining whether or not a contract is a standard form contract, expand the range of contracts subject to these regulations, and allow the courts to consider a wider range of factors when determining if a contract is a standard form contract
- Even contracts that allow some negotiation or are influenced by third parties, can still be considered a standard form contract
Impact on Small Businesses
- The changes will extend protection against unfair contract terms to more small businesses – defined as those with 100 employees or fewer and an annual turnover of less than $10 million
- The amendments will cover new standard form contracts and modified old ones affecting small businesses meeting the specified criteria
- New penalties and heftier fines will also be introduced for breach of the law, including fines greater than $50 million for companies or $2.5 million for individuals if found to be using unfair contract terms
What Can I Do?
- Small business owners should get their contracts reviewed to ensure their compliance with new laws and to avoid the hefty penalties
If you would like a consultation on the legislation changes, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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