In November 2023 changes to the law on unfair contract terms came into force, applying to a significantly expanded category of small business.
Small business definition changes to include larger businesses
The legal definition of a "small" business rose from one with fewer than 20 employees, or annual turnover up to $3 million, to a business with up to 100 employees, or up to $10 million in annual turnover.
These larger small businesses are now covered by the unfair contract terms law for any new or varied standard form contract.
Businesses using standard form contracts should get legal advice on whether they and their customers are included in light of the revised criteria, and what the changes mean for them.
Unfair contract terms in standard form contracts banned
Under the new law, proposing, using or relying on unfair contract terms in standard form contracts is banned, including for these larger small businesses.
These law changes form the second tranche of amendments to unfair contract terms contained in the Treasury Laws Amendment (More Competition, Better Prices) Act 2022.
Definition of standard form contract
A standard form contract is a pre-written contract where the customer can't change any, or the majority, of the terms in the contract. Even if parts are unfair, the customer can only take it or leave it.
When deciding what a standard form contract is, a court will consider whether one of the parties has all or most of the bargaining power, or didn't allow any discussion or negotiation of the terms, and whether one side could only accept or reject the terms.
Terms are unfair if enforcing them would cause financial or other harm to one party, would cause a significant imbalance in the rights and obligations of one party, and would be unnecessary to protect the interests of the party that gets an advantage from the terms.
Penalties for breaches
Penalties for breaches of the law apply and they are significant. The maximum penalty for an individual is $2.5 million, and for a business is $50 million.
However, a court may also set a penalty that is three times the value of the benefit obtained from the unfair contract, or 30 per cent of the adjusted turnover during the breach period.
ASIC suing PayPal for unfair contract term with small business customers
In September 2023 the Australian Securities and Investments Commission commenced legal proceedings against PayPal Australia, alleging its standard form contracts with small business customers contained an unfair contract term. (Please see ASIC sues PayPal Australia for alleged unfair contract term with small businesses, ASIC, 7 September 2023.)
ASIC has also issued proceedings against two insurance companies, alleging their standard contracts contained unfair terms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
