Timothy Wright, Commercial Litigation Lawyer at Attwood Marshall Lawyers, looks at the new regulatory regime that aims to stop companies imposing unfair contract terms on their small business customers, with the laws now applying to a larger number of firms and including harsher penalties.
Big changes on the way
Companies that include unfair terms in their contracts with consumers and small businesses will be subject to a harsher civil penalty regime come November 2023, when an amendment to the Competition and Consumer Act 2010 comes into effect.
The biggest changes will apply to standard form contracts, when a business uses a pre-written, pro forma contract for all their customers whereby the customer has no power to change the terms. Such contracts are rife in the building and construction industry.
The Federal legislature has taken aim at contracts for the supply of goods and services, the selling or leasing of land and contracts for supplying financial services or financial products.
The government has put businesses on notice since November 2022 to review their contracts to make sure they do not include any unfair terms, when the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 was passed through Parliament.
The amendment applies from 9 November 2023, one year after it received Royal Assent.
Currently, a Court can void contract terms if they are found to be unfair. But the current regime hasn’t effectively deterred larger entities from taking advantage of smaller companies via unfair contract terms.
Under the new regime, the Court will also be able to levy financial penalties, vary or refuse to enforce a contract, or order injunctions to prevent the offending terms being used.
To find out whether the new rules apply to you and your dealings with other companies or businesses, you first need to consider: is your contract a standard form contract? If yes, is your contract a small business contract? The definitions for both contracts types have now changed, covering a larger number of businesses which will be eligible to contest that terms of a contract are unfair.
What is an unfair term?
A court may find a contract term unfair if:
- It causes a significant imbalance between the rights and obligations of the parties,
- The term is not necessary for protecting the advantaged party, or
- It causes detriment to a party.
The court also takes into account the bargaining power of the company that drafted the contract, whether any discussion took place between the parties before the contract was prepared, and if so, whether the other party had any real opportunity to discuss, or accept or reject, the terms.
For the construction and building industry, an unfair term may:
- Allow the builder to increase the price of the contract without any prior notice,
- Restrict the amount of time a party has to make a claim,
- Allow termination without cause and compensation, or
- Allow one party to unilaterally vary a contract without the right of the other party to terminate the contract, such as by:
- limiting or avoiding the performance of the contract,
- changing the goods or services provided, or
- assigning the contract to the detriment of the other party without that party’s consent.
In determining whether a contract term is unfair, a court can consider anything it finds relevant. However, it is required to look at the whole contract and the transparency of the term itself – that is, whether it is written in plain language, legible, presented clearly and readily available to any affected party.
Fixing a broken system
Assistant Minister for Competition and Treasury Dr Andrew Leigh said in September 2022 that a stronger deterrence than the current regime was necessary, because the use of unfair terms remains widespread in standard form contracts.
He said the reforms will “better protect” consumers and small businesses who “lack the resources and bargaining power” to negotiate with bigger companies, and in turn boost their confidence when entering standard form contracts.
Legislatures have addressed the prevalent imbalances by expanding the definitions of both small business contracts and standard form contracts.
Changes to Small Business Contracts
Currently, under the Australian Consumer Law, a contract is considered a small business contract if at least one party is a business that employs fewer than 20 people and the upfront price of the contract is no more than $300,000. A contract also qualifies if it lasts for more than one year and has an upfront price of less than $1 million.
That’s all set to change in November, with the new unfair terms’ regime applying to contracts with at least one company that employs fewer than 100 people or has an annual turnover of less than $10 million. It will apply regardless of the contract’s value.
Changes to the definition of “standard form”
Under the new reforms, a contract will be considered a standard form contract even when the consumer has been able to negotiate minor or insubstantial changes to the terms of the contract or has been able to select a term from a range of options that are determined by the party with greater bargaining power. A contract will also be considered a standard form contract if a consumer can negotiate the terms of another contract or proposed contract.
Interestingly, if a Court finds more than one unfair term within a contract, each term will be considered an individual breach. That means companies may commit multiple breaches of the law under the one contract exposing them to multiple penalties.
The reforms go wider than unfair contract terms, too. Higher penalties will also apply to other misconduct under competition and consumer legislation. That includes for unconscionable conduct, false or misleading representations, harassment, coercion, or supplying products that breach safety rules.
For businesses, the new maximum financial penalty has increased to $50 million, or three times the benefit obtained from the conduct, whichever is greater. If no benefit can be identified, the penalty equates to 30 per cent of adjusted turnover during the breach period.
Under the former system, the maximum penalty was $10 million, or three times the benefit or 10 per cent of relevant turnover.
For individuals, the maximum penalty will increase from $500,000 to $2.5 million.
Real life example of unfair contract terms
Attwood Marshall Lawyers was recently instructed by a subcontractor to review the contract it had with a head builder.
The client wanted to make sure his tools, equipment and machinery were protected if the head builder fell into financial hardship and external administrators were appointed or the contract was terminated.
To our shock, the contract that the head builder had provided had the opposite effect, and instead provided that:
- In the event the contract was terminated, all the subcontractor’s rights, title and interest in all of its materials, construction plant and equipment intended for the works under the subcontract (whether onsite or off) would immediately vest with the head contractor; and
- The subcontract contained a clause which gave the head contractor an irrevocable authority to register a security interest over the subcontractor’s materials, construction plant and equipment and other things intended for the works under the subcontract.
We successfully negotiated amendments to the offending provisions. However, with the proposed changes to the consumer laws, such terms may soon be void all together.
Indeed, if a contract is a standard form contract, falls within the scope of a small business contract and the disputed term is found to be unfair, then the term of the contract will be void and therefore, unenforceable.
Attwood Marshall Lawyers – experts in competition and consumer law
With a dedicated team of construction litigation lawyers, and a strong understanding of the legal options available to its clients, Attwood Marshall Lawyers has a proud history of acting for builders, tradesmen and contractors, with an enviable track record of achieving optimal results for clients that find themselves in a dispute over a contract.
If you suspect that a contract you have been given is unfair, speak to our lawyers for advice. Our litigation and dispute resolution team also has expertise in debt recovery, consumer and business disputes, insolvency, and class actions. Please contact our Commercial Litigation Department Manager, Amanda Heather, on (07) 5506 8245, email firstname.lastname@example.org or free call 1800 621 071 to find out where you stand.