$50m for an unfair contract

This Update is a reminder as to recent changes to the legislation relating to unfair contracts. The changes mean that parties who put forward or try to rely on unfair terms in contracts can be liable for severe financial penalties.  

The changes came into force on 9 November 2023 via the Treasury Laws Amendment (More Competition Better Prices) Act 2022 (Cth) and will apply to all contracts formed on or after that date. The changes will also apply to contract variations and existing contracts that are renewed on or after that date.

Law prohibiting unfair contract terms has been in place for several years. However, these changes mean that most building and construction industry contracts will be subject to the legislation.

Key Changes

From 9 November 2023:

  • Expansion of the definition of ‘small business’ means that the legislation applies to all contracts formed with a business employing less than 100 people or with an annual turnover of less than $10 million.
  • There is no maximum contract price for ‘small business contracts’ (previously capped at $300,000).
  • A contract may be determined to be a standard form contract despite there being an opportunity for a party to negotiate minor or insubstantial changes, select a term from a range of options, or negotiate terms of another contract.
  • Most construction contracts will be covered.

From that date, proposing, applying, or relying on an unfair contract term is prohibited and attracts very substantial civil penalties. Having an unfair term in your standard form consumer or small business contract means that you have breached the law. Each unfair term is a separate breach, giving rise to a separate penalty as follows:

  • for individuals, up to $2.5 million.
  • for corporations, up to the greater of:

  • $50 million;
  • three times the value of the benefit from the unfair term; or
  • 30% of the adjusted turnover during the contravention turnover period.

Additionally, Courts will now be able to make a range of orders, including orders preventing the same/similar terms from being included in future standard form small business or consumer contracts.

When is a term unfair?

A term is unfair when:

  • it causes a significant imbalance of parties’ rights and obligations;
  • the term is not reasonably necessary to protect legitimate interests of the party relying on it;
  • the term will cause detriment (financial or otherwise) to a party if it is applied or relied upon.

What types of clauses are unfair?

Some examples of terms that may be unfair include terms that:

  1. give one party significantly more control than the other party;
  2. allow for one party to terminate the contract in a much broader range of circumstances or gives a unilateral right of termination;
  3. allow for one party to vary the price payable without the other party having right to terminate;
  4. has broad indemnities favouring only one party or imposing a no-fault liability;
  5. allow for one party to vary the contract or the goods and services to be supplied without agreement from the other party;
  6. allow one party unilaterally to determine whether a contract has been breached or to interpret its meaning;
  7. allow for one party to assign the contract without consent, to the detriment of the other party; or
  8. give one party significantly more rights or obligations than the other.

The Court will consider a number of factors in determining unfairness, one of which is how transparent the term is – how readily it can be seen and understood by the other party. A term is more likely to be transparent if it is in plain language, legible with font that is not too small, presented clearly and readily available (for example, if a contract incorporates another document (such as a policy or a head contract), that document must be easy for the party contracting to get access to). However, just because a contract term is transparent does not mean that it is fair.

Terms that define the core subject matter or terms that set the upfront price payable will not be unfair.

What is a standard form contract?

A standard form contract is a one that is prepared beforehand by one party without the input of or negotiation with the other party. This could cover situations where:

  1. the contract was provided by one party to the other before the parties entered into discussions;
  2. there is little or no room for one party to negotiate the terms of the contract;
  3. the same or a similar contract is used by one party repeatedly; or
  4. the contract is offered on ‘take it or leave it’ basis.

In the construction industry, it is very common for a principal or head contractor to put forward the initial contract terms. Often, larger contractors put forward contracts on a “take it or leave it” basis. In the residential sector, it is unusual for a contractor to agree to negotiate significant changes to one of the standard form contracts. Contracts formed under these circumstances will be governed by the legislation. 

Even if there is an opportunity for parties to negotiate changes, if those changes are minor or inconsequential, the contract can still be found to be a standard form. Depending on the circumstances of each individual case, allowing a party to choose from a number of options within a contract may also not be sufficient to rebut the presumption that that contract is standard form. The fact that a party has entered into or negotiated the same contract terms previously on other projects will not change the likelihood that the contract is governed by the legislation.  

The new protections will be of benefit to some businesses and present risks to others. It will be important for businesses that want to include potentially unfair terms in their standard form contracts to consider how they would establish that the term was reasonably necessary to protect their legitimate business interests if the term was ever challenged.   

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