Contract terms

CONTRACT LAW UPDATE: Retailers may face penalties for unfair contract terms

Contract terms have always been finicky, especially with the sheer volume of contracts that Retailers are required to deal with on a day to day basis – this ranges from contracts with suppliers, distributors and customers. In the past, contracts which were unbalanced would not incur any civil penalties. Instead the unfair term would simply be voided or would need to be reworded.  

On the 10 November 2020, the Federal Government announced plans to enact two waves of reforms relating to unfair contract terms. Firstly, effective from the 5 April 2021, the Insurance Contracts Act 1984 (Cth) will be extended to include general insurance, such as car insurance, travel insurance, life insurance and house and contents insurance.  Secondly, there are further plans to make unfair contract terms illegal and subject to civil penalties. This will have significant implications for retailers!

When these reforms will be enacted is yet to be determined, however it serves as a clear reminder for businesses to review their standard form contracts to ensure they do not contain any terms that could be deemed to be unfair.

While we are awaiting more information regarding these proposed changes, please see below for a quick refresh on unfair contract terms and more detail on how these laws will be updated with the upcoming reform:

What is an unfair contract term?

A contract term is unfair if it satisfies all the conditions below:

  • It would create a significant imbalance in the parties’ rights and obligations under the contract
  • It is not reasonably necessary to protect the legitimate interests of the party who would benefit from the term
  • It would cause detriment to a party, whether financial or otherwise

What is a standard form contract?

A standard form contract means a template contract form of one party, where the other party is not given the opportunity to negotiate it.

What are the proposed changes?

  • Unfair contract terms will be unlawful and subject to civil penalties under proposed changes to Australian contract law. Currently, unfair contract terms are only void and there are no civil penalties which apply.
  • Courts will be able to choose a remedy if a standard form contract is found to have unfair contract terms. Under the current Australian contract law, terms declared unfair by a Court are automatically void but this new law takes things to a whole new level of liability for business owners.
  • The definition of a ‘small business’ is going to be expanded to include significantly more businesses;
    • Less than 100 employees; or
    • An annual turnover of less than $10 million.

Whereas currently, a ‘small business’ is one with:

  • Less than 20 employees; and
    • Either an upfront price payable under the contract of
      • Under $300,000; or
      • $1 million, if the contract is over 12 months
  • Both ‘non-party consumers’ and ‘non-party small businesses’ will have remedies available to them for loss or damage suffered as a result of an unfair contract term. Current Australian contract law does not clarify that non-party small businesses are able to access these remedies.
  • If a comparable term used in similar circumstances has already been declared as unfair, there will be a rebuttable presumption that the term will also be an unfair contract term.
  • The meaning of ‘standard form contract’ will be clarified to take into factors such as:
    • Whether a contract template is used repeatedly
    • Whether a small business had the opportunity to negotiate a contract
  • Clauses that include industry-specific requirements already contained in legislation will be exempt. Under current Australian contract law, only terms which are expressly permitted by legislation are exempt.

Final thoughts

The Federal Government will be releasing draft legislation for these proposed changes shortly. To avoid civil penalties for unfair contract terms, retailers should have their contracts reviewed for any unfair terms.

Gladwin Legal are experts in contract law. If you would like to know how we can help, please contact us for a no-obligation quote.