As previously discussed in our piece: Unfair Contracts, Resetting the Balance Between Big and Small Businesses, new laws have been passed (effective as of 9 November 2023) that prohibit the use of “unfair contract terms” in standard form small business contracts. These laws have important implications for both large and small businesses.
For small businesses, they provide protection against commercial bullying by larger suppliers or customers with which the small business must deal. For their part, big businesses have to demonstrate a willingness to negotiate contract terms with their smaller suppliers or customers.
The three concepts of Unfair Contract Terms Law
The Unfair Contract Terms laws rely on three key concepts:
- There must be a “small business contract”
A small business is defined as an entity, which employs up to 100 people and has an annual turnover of less than $10 million. The employee limit increase from 20 to 100 effectively broadens the range of what constitutes a small business in Australia. In addition, the upfront price payable under the contract must not exceed $5 million. - The contract must be a “standard form contract”
There are a number of factors that determine whether this applies, but in simple terms a contract is likely to be in “standard form” if it is presented to the small business on a largely non-negotiable (i.e. a take it or leave it) basis. A contract may also be classified as a standard form contract if one party has the majority of the bargaining power, the opportunity to make amendments is minimal or the range of any viable options to select from are set by one party. - The contract must contain “unfair” terms.
Unfair terms can apply in situations where they:
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- Can cause a significant imbalance in the parties’ rights and obligations (e.g. limitations of liability, indemnities or termination rights);
- Are not required to protect the legitimate interests of the party that would be advantaged by them; and
- Would cause detriment (financial or otherwise) to a party if the term were to be relied on.
Some examples of unfair contract terms may include: automatic renewal clauses, unilateral price increases, price setting post-contract signing, commentary restrictions on a business and unfair indemnity clauses.
What are some contracts that may be impacted by the Unfair Contract Laws?
Commercial Contracts
- Standard terms and conditions
- Sale or supply contracts
- Online terms (click-wrap, scroll-wrap, web-wrap)
- End user agreements, software licensing, resale agreements
- Purchase order conditions
- Consulting contracts
- Service contracts
- Maintenance contracts
- Contractor/ Subcontractor agreements
- Hire, Lease or Licensing conditions
- Conditions for tenders and requesting expressions of interest
- Non-disclosure agreements
- Conditions imposed through notices or tickets – such as for use of a facility, for car parks or for entertainment
- Building contract conditions
- Employment conditions
Construction Industry Contracts
- Standard form industry contracts such as HIA, MBA, ABIC, AS, GC21, FIDIC, ICE, NEC
- Bespoke contracts, including amendments, special conditions and variations
- Contracts with principals, owners, trades, consultants, sub-contractors, suppliers, certifiers financiers and insurers
- Construction contracts, design and construct contracts, consulting agreements, client architect agreements, certifier engagements, supply contracts, supply and install contracts, maintenance contracts, remediation contracts, rectification contracts, hire agreements, lease arrangements, tripartite deeds, finance agreements, novation deeds, construction loans and insurance contracts
Property Industry Contracts
Applicable for standard form contracts for businesses such as property owners, developers, landlords or managers including:
- Contracts for the sale of land
- Off-the-plan contracts
- Leases: shopping centre, ad-hoc
- Options
- Estate agents authorities
- Management agreements
- Building and Service contracts
What are the penalties?
These laws impose penalties (as outlined below) on businesses that include unfair contract terms in their standard form contracts with consumers and small businesses.
The courts now also have the ability to impose financial penalties on offenders, up to the greater of:
- 50,000 “penalty units” (currently $110 per penalty unit, or $5,500,000)
- Three times the benefit derived or detriment avoided by the perpetrator (if capable of determination by the court); or
- 10% of the perpetrator’s annual turnover, up to 2,500,000 penalty units
In addition, the courts also have the ability to make a range of orders, including:
- Declare part or all of the contract void;
- Vary the contract or refuse to enforce certain terms stated within it;
- Enforce the refund of money, return of property or provision of services to the impacted party; or
- Prevent any further application of the same or similar terms in future contracts.
How far do these Unfair Contract Term Laws go?
In December 2023, the High Court of Australia held that Australia’s unfair contract term laws can apply to contracts not wholly or partially performed in Australia.
In its decision in Karpik v Carnival plc [2023] HCA 39, generally referred to as the “Ruby Princess Case” the court determined that Australia’s unfair contract term laws (UCT Laws) (namely section 23 of Schedule 2 to the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law), apply to certain contracts for the provision of goods and services outside of Australia.
In this case, a class action was brought forward for loss or damage against Carnival plc and a subsidiary (collectively, Carnival), concerning a voyage in March 2020, during which multiple passengers contracted COVID 19 and some of whom died as a result.
Whilst 696 passengers from the United States (US) agreed to Carnival’s standard form terms and conditions, which saw Carnival argue that these passengers could not form part of the class action proceedings., the US passengers argued that section 23 of the Australian Consumer Law applied to the US T&Cs and, as such, the Waiver was an unfair contract term and was therefore void under the UCT Laws.
After the application of Australian principles of statutory interpretation, the Court determined that the UCT Laws apply to all standard form small business contracts and consumer contracts where at least one party is incorporated in Australia or carries on business in Australia, including in the following circumstances:
- Where the contract is for goods that are provided, or for services that are performed, wholly or predominantly overseas
- Where the goods or services are acquired by a business or consumer located overseas
- Where the contract contains clauses specifying that the law of a jurisdiction other than Australia will govern the contract.
This decision will no doubt have significance for business-to-business and consumer dealings where one party is located in Australia or carries on business in Australia and impact the negotiation and formation of contracts governing these extraterritorial dealings.
How to ensure your contracts align with these laws
When creating or reviewing contracts, it is diligent to take the following steps:
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- Consider both parties perspectives. For example, if you think you need a particular term in order to protect your business, it’s important to consider its impact on the other party.
- Clarity is key. Avoid using broad, generic terms and be specific when drafting terms aimed at protecting your legitimate interests.
- Fulfill your obligations. Ensure that you adhere to any relevant obligations as outlined by Australian Consumer Law obligations.
- Counter-balance your contract terms. For example: if you believe you need to be able to make unilateral changes to a good or service you’re providing, do you simultaneously allow the other party to exit the agreement if this occurs?
- Keep it simple. Avoid using jargon or overcomplicated terminology in your contracts to avoid the possibility of misinterpretation or misunderstandings.
- Transparency is top priority. Ensure key terms are clearly communicated during the sign up and renewal process.
Conversely, if you are a small business (as defined in the aforementioned three concepts) and are at the receiving end of an unfair contract term within a standard form contract you may take the following steps:
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- Communicate with the contract provider. It is worthwhile exploring whether it is possible to resolve the issue via amending or removing the term.
- Commence dispute resolution. This can be done via alternative dispute resolution schemes or industry ombudsmen.
- Seek legal advice. If the contract provider is unwilling to address your concerns, obtain legal advice in order to explore possible courses of action to remedy the situation.
- Lodge a complaint. You can submit a complaint to the ACCC or the relevant state consumer protection agency.
If you have any queries or would like further information please contact the team at Antcliffe Scott.