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Understanding the Changes in Unfair Contracts

In a recent development, the regulations around Contracts for Service in Australia have undergone significant changes, stemming from revisions to the Australian Consumer Law 2010. Effective as of November 9, 2023, these alterations are set to impact a wide array of businesses, potentially affecting how contracts are structured and enforced across the board.

One of the most notable shifts is the expansion of coverage to include “small businesses.” Previously, this term referred to entities with fewer than 20 employees or an annual turnover of less than $10 million. However, the updated definition now encompasses businesses with fewer than 100 employees or a turnover below $10 million in the last financial year. This expansion broadens the scope significantly, encompassing not only small companies but also subcontractors and their agreements with other entities.

Below is a quick overview of the changes and how they could impact your business:

Unfair Contracts – Quick Overview

What is it?

Recent changes to the Australian Consumer Law 2010 have brought significant shifts in how Contracts for Service are managed. Effective from 9 November, 2023, these adjustments carry substantial implications for businesses dealing with contracts outside the realm of employment agreements.

Why does it matter?

The scope of these changes has widened considerably. They’re likely to impact you more directly than before. Whether you’re a small business owner or working within subcontracting arrangements, these amendments might affect how you conduct business.

Moreover, these changes bring about a dual-edge effect. On one side, they might work in your favour by leveling the playing field in contracts, potentially minimizing legal disputes. On the other hand, they could also work against you if your contracts contain terms that are considered unfair under the new regulations.

Who does it apply to?

Expanded coverage now includes “small business”, which means any business that:

      • has fewer than 100 employees; or
      • had a turnover of less than $10 million in the last income year.

That will be a lot of subcontractors. Will also be your subcontracting arrangements with other entities.

What contracts does this apply to?
Three requirements:

      • A “Standard form contract”
      • “Upfront price payable”, and;
      • a party is a “small business.”

Standard Form Contract = Take it or leave it, no opportunity to negotiate, limited bargaining power between parties.

What is an “unfair term”

      • Would cause significant imbalance under contract.
      • Not reasonably necessary to protect.
      • Would cause detriment if applied.
      • Only Court, Tribunal, or Adjudicator can decide.
      • But now much more to lose if you use or assert an unfair term – massive fines.

Possible examples of unfair terms:

Unfair payment terms, termination for convenience, automatic rollovers, force majeure clauses, complex website terms.

Legal consequences:

It will be illegal to assert, apply or rely on unfair contract terms. The maximum civil penalty, per breach, for a company is the greater of:

Company = $50 million; or three times the value of that benefit (default of 30% of company’s “adjusted turnover”)

An individual is $2.5 million per breach

What’s next?
Consider your contracts for service; either issuing or receiving. Seek legal assistance to update your contracts for service. Consider the terms of contracts issued to you – are their one-sided and imbalanced terms?

Many of the impacts of these new laws are likely to be achieved without individual contractors having to take their own court action to enforce the law and strike out unfair contract terms. This was the case under the previous laws.

These new laws make it unlawful and much higher penalties can apply if a business seeks to rely on unfair contract terms. This will have the expected effect of making those historically ‘one-sided’ clauses like:

      • Unilateral rights for one party to extend the contract for unlimited time periods
      • Some types of termination for convenience clauses
      • Some types of unilateral right to suspend without reason
      • Unfair payment terms such as:
        • one-sided right to vary charges/rates, for example as applied to variations
        • exclusion of ability to receive payment for pre-ordered goods upon termination
      • One-sided limitation of liability clauses e.g. liability caps
      • One-sided indemnity terms especially where the party has no control over the risk (common to the electrical contracting industry)

The effectiveness of this legislation will see these types of contract terms fall out of favour as the risk of penalties outweighs the risk mitigation which the term seeks to protect against.

This overview aims to simplify the key aspects and encourage businesses to review and adjust their contracts accordingly, considering the new regulations.

For legal assistance, consider contacting our industry partner Cornwalls at (07 3223 5900).

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