Dramatic Increase in Penalties for Unfair Contract Terms
Beware of unfair contract terms in your terms and conditions. Recent proposed amendments to the law are intended to strengthen protections for consumers against unfair contract terms. The amendments include significant penalties in the tens of millions of dollars.
Who needs to know?
You will be impacted if your business has terms and conditions which customers are required to agree to before doing business with you. Whether you sell products or services. You should be mindful of the current law as well as the proposed amendments which will have substantial implications for your business.
What do you need to know?
Already individuals and businesses are protected from certain onerous or unfair terms under the Australian Consumer Law and the ASIC Act.
The Commonwealth Government has proposed amendments to those laws which introduces new prohibitions with significant penalties and applicability to an expanded range of business contracts.
What is an unfair term?
Currently the law asks three questions to determine whether a term is unfair:
- Does the term cause significant imbalance in the parties’ rights and obligations?
- Is it reasonably necessary in order to protect the legitimate interests of the party advantaged by the term?
- Will it cause detriment (financial or otherwise) to a party, if enforced?
Courts will consider the extent to which the terms are transparent and the contract as a whole. The transparency of the term is determined by whether it is in reasonably plain language, legible, clearly presented and readily available to the customer.
What do the proposed amendments mean?
Terms that are found to be “unfair” by a Court will be made void. This means you will not be able to rely on or enforce them against your customers. There is a risk that this will void the whole contract if the term is central to the contract.
The proposed amendments introduce new prohibitions from entering into a standard form contract that contains an unfair term and enforcing or relying on an unfair term. This places a greater onus on businesses to review their terms and conditions now and to remove any unfair terms.
The amended law also contains the presumption that terms in standard form contracts that are deemed “similar” to those proclaimed to be unfair, will also be unfair.
Serious penalties proposed
The new prohibitions carry with them hefty maximum pecuniary penalties, including the greater of:
- $10 million;
- 3 x the benefit (if it has a value) that the one party obtains via the term;
- 10% of annual turnover for the previous 12 months (if a value of the benefit can’t be determined by the Court).
Courts will also have alternative remedies to damages, including to void, vary or refuse to enforce part or all of a contract.
Courts will have powers enabling them to injunct (stop) a person from entering into any future contract that contains the same or similar unfair term and prevent or reduce loss to any person caused by a term in an existing contract that is similar to a term that has been declared unfair. This is a very wide-reaching power of the Court and will likely be exercised with care. We expect that only the most serious breaches of the law will justify an injunction of similar terms.
Broader application proposed
The proposed amendments also include a broadening of the definition of “small business”. This means a greater number of customers, including other businesses.
We recommend taking the time to review your terms and conditions to ensure that they do not contain any unfair contract terms and to assess your potential exposure. This is important even if the stricter amendments to the law are not passed.
If you have any concerns about your terms and conditions, please contact one of our an experienced commercial law team members on (03) 9481 2000 or firstname.lastname@example.org.