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The Federal Government has announced its intention to expand the scope of the unfair contract terms regime in the Australian Consumer Law.

To recap, a term in a “consumer contract” or “small business contract” (as defined in the Australian Consumer Law) is unfair if it meets all of the following:

  • it would cause a significant imbalance in the rights and obligations of the parties under the contract
  • it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term
  • it would cause detriment (financial or otherwise) to a party if the term were to be applied or relied on

The Australian Consumer Law lists examples of unfair contract terms, such as a term which allows one party (but not the other party) to terminate the contract.

The planned changes include:

  • making unfair contract terms unlawful and not merely voidable, thereby giving rise to penalties for businesses which include unfair contract terms in their standard form contracts (eg, in their terms of trade)
  • expanding the definition of “small business contract” to a contract where one of the parties employs less than 100 people (previously it was 20 people) and has an annual turnover of less than $10 million
  • removing the “upfront price payable” threshold for small business contracts (previously this was $300,000, or $1 million if the contract term was greater than 12 months)
  • providing greater clarity about the meaning of a “standard form contract

The proposed changes are designed to address the shortcomings of the current unfair contract terms regime which excluded too many small businesses on the basis of the “employee headcount” and “upfront price payable” tests.

The Commonwealth Treasury Department will now begin the process of preparing draft legislation for consultation.

Action Item

Although businesses must already ensure they comply with the existing unfair contract terms regime, if the proposed legislation is passed then it becomes even more imperative to remove/satisfactorily amend any unfair contract terms otherwise penalties will apply.