Reform of Unfair Contracts

Wednesday, November 22, 2023

In 2021 there was a major reform to laws dealing with unfair contract terms found in standard form contracts, which have made it harder for large companies to continue their unfair practices.  

So, what are unfair standard form contracts?

A standard form contract is one where one party has all the bargaining power, they prepare the contract, and in effect, there is no opportunity for the other party to negotiate the terms of the contract. For example, the contract might give important rights solely to one party such as the ability to change the contract price or terminate the contract. These kinds of contracts often disadvantage small businesses.

What is an unfair contract term?

The laws relating to unfair contract terms can be found in Australian Consumer Law (“ACL”) and the Australian Securities and Investments Commission Act 2001 (“ASIC Act”). Under the ACL and the ASIC Act, a contract term is unfair if it:

(a)  Causes a significant imbalance in the parties’ rights and obligations under the contract, heavily favouring one party;

(b)  Is not reasonably necessary to protect the interests of a party who gains an advantage from the term; and

(c)  Causes harm to a party if the term was to be relied on.

What is the major reform?

The reform comes from a draft bill, which has been introduced into Parliament, proposing to eliminate these kinds of one-sided contracts. The bill proposes to expand the current definition of a ‘small business contract’ so that current unfair contract term laws will protect more businesses, and more importantly it proposes to introduce penalties for any corporation that uses unfair terms in their contracts.

What happens if a court declares a term to be unfair?

Under the proposed reforms, if a term is declared to be unfair, the Court will remove the term from the contract, or declare the contract to be entirely void if the term was essential. The Court will then proceed to hand down a penalty to the infringing corporation. The fine will be imposed on a clause-by-clause basis under the Contract, with individuals being liable for penalties of up to $500,000. Additionally, the proposed reforms include a penalty that allows for chief executives, upper management, and chairs of corporations to be suspended if their company is found to be using unfair standard form contracts.

The introduction of such harsh penalties for offending companies is revolutionary in an industry that has previously only seen unfair contract terms be voided without penalty. This provides a necessary check on the power large enterprises currently have over small businesses.

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