Under the Australian Consumer Law (ACL), small businesses are protected from unfair contract terms in standard form contracts. Small businesses are currently protected from unfair terms if they employ fewer than 20 persons or the contract price payable is under $300,000 (or $1 million for contracts lasting over 12 months). If a small business believes that a term in a contract that it is a party to is unfair, it may ask the court to declare the offending term void.
On 9 November 2023 the threshold under the ACL for small business contracts will increase to apply to small businesses that employ fewer than 100 persons or have an annual turnover of less than $10 million. This follows the enactment of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) in November 2022 (the Act). The Act not only broadens the scope of the definition of a ‘small business’ but also increases the civil penalties that can be imposed for unfair contract terms.
Parties who have contracted with small businesses using standard form contracts will soon face significant penalties for unfair contract terms. A court will soon be able to impose, for a single contravention, the greater of:
- $50 million (instead of the base of $10 million for a body corporate and $0.5million for an individual as instated 30 years ago);
- 3 x “reasonably attributable” benefit of the contract; or
- 3 x “adjusted turnover” during the breach period.
Nonetheless, the changes to the penalties are only expected to raise an extra $55.4 million in the 2025-2026 financial year.
This applies to both new contracts and contracts amended on or after 9 November 2023.
What is a ‘standard form’ contract?
A ‘standard form contract is usually described as a contract that is ‘offered on a ‘take it or leave it’ basis’, between a business and customer. The contract is usually pre-written by the business and presented to the customer without the opportunity for negotiation or amendments.
A court will determine whether a contract is of a ‘standard form’ and covered by the regime depending on whether one of the parties to the contract:
- has all or most of the bargaining power in the transaction;
- prepared the contract without or before any discussion between the parties about the transaction;
- could effectively only either accept or reject the terms of the contract as presented;
- was given any real opportunity to negotiate the terms of the contract; or
- whether the terms of the contract take into account any specific features of the other party or the transaction.
The Act provides further guidance to courts in determining whether a contract is of a ‘standard form’. A court will soon be able to consider whether the party preparing the contract has made similar contracts in the past and how many times they have done so. The Act also clarifies that a contract may be deemed a ‘standard form’ contract despite the protected ‘small business having:
- the opportunity to negotiate changes to terms of the contract that are minor or insubstantial in effect;
- the ability to select terms from a range of options; or
- previously been able to negotiate other contracts with the same other party.
Determining the ‘fairness’ of a contract term
According to the ACCC, contract terms are considered unfair where they:
- cause a significant imbalance in the rights and obligations of the parties under the contract,
- are not reasonably necessary to protect the legitimate interests of the party who gets an advantage from the term, and
- would cause financial or other harm to the other party if enforced.
A common example of unfair terms is an ‘ipso facto’ term. An ‘ipso facto’ clause is a provision in a contract that allows one party to terminate or modify the operation of a contract upon the occurrence of some specific event, regardless of the continued performance of the other party. For more information regarding ‘ipso facto’ terms, see our article: The new ‘ipso facto’ regime and SMSFs.
Further examples and information regarding unfair contract terms can be found on the ACCC website, and, for contracts relating to financial products and services, the ASIC website and Information Sheet 211.
Application to SMSFs
SMSF trustees regularly enter into all sorts of contracts and should be aware of the unfair contract terms to be in a position to protect their legal rights.
Businesses should ensure they review all standard form contracts and vary them to ensure they do not contain unfair terms that will result in penalties or reputational damage. The increased coverage of the unfair contract terms and the increased penalties that apply from 9 November 2023, provide small businesses more rights to challenge unfair terms in standard contracts.
Naturally, DBA Lawyers would be pleased to assist.
- The new ‘ipso facto’ regime and SMSFs
- Many building and similar contracts place SMSFs at risk
- SMSFs and contractual tips and traps
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
25 October 2023