Australia: Monster penalties, for small business and those dealing with small business, for unfair contract terms

Can you afford up to $50 million or 30% of your business's turnover for each unfair term of your contract?

Recent reforms have passed which vary the regime for standard form contracts and the penalties imposed for unfair contract terms. The new penalties are severe (potentially crippling) and access to bring actions against companies who employ unfair contract terms have widened to include private contracting parties and even disgruntled customers.

Will you be caught?

Are you a small business? Or do you do trade with small businesses?

The definition of a "small business" is now any business that employs fewer than 100 staff OR has an annual turnover of less than $10 million.

For your contract to be caught by the new unfair contract terms regime it will not matter if your business is excluded from being a small business, if the parties you deal with are classed as a small business, then your contract may be covered.

Most Businesses use some form of Standard Form contracts! Are You?

You may be relying on such T's & C's as website terms and conditions, or printed on your invoices or credit agreements, which are generally caught as standard terms. Even if a person contracting with you can negotiate minor terms, your contract may be considered a Standard Form Contract and will be caught in this regime.

Are any of your Terms or Conditions Unfair?

What is unfair may be the toughest but most important consideration you give to your contract terms. While courts have given us some guidance on what may be considered an unfair contract term, each contract will still be considered on its own and in the context of how the contract is used as a whole in the circumstances.

Given the potential penalties involved and the new access to bring claims against parties for unfair contract terms, no small business can afford to simply say "Let's suck it and see!"

The amendments to the legislation are giving business until 10 November 2023 to look at their contract terms and make any necessary changes, because after that "The Game is On!" and it will be open season on unfair contract terms and the business trying to rely on them.

Some examples of terms that Courts have found to be unfair include:

• A term that permits one party (but not the other party) to avoid or limit performance of the contract - for example, no liability even for a negligent or wilful acts.
• A term that allows one party (but not the other party) to terminate the contract - for example, termination for any breach even if inconsequential.
• A term that penalises one party (but not the other party) for breach or termination - for example, a termination fee or interest penalty that is arbitrary and bears no relationship to the actual loss.
• A term that allows one party (but not the other party) to unilaterally vary the terms of the contract - for example, a term allowing change of price at a party's discretion without the other party having a right to terminate.
• A term that allows one party (but not the other party) to renew or not renew a contract - for example, automatic renewal for a lengthy term without the opportunity to terminate.
• A term that permits one party (but not the other party) to vary the upfront price payable under the contract without the right of another party to terminate the contract;
• A term that permits one party unilaterally to vary the characteristics of the goods or services to be supplied under the contract;
• A term that permits one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
• A term that limits, or has the effect of limiting, one party's vicarious liability for its agents;
• A term that permits one party to assign the contract to the detriment of another party without that other party's consent;
• A term that limits one party's right to sue another party;
• A term that limits the evidence one party can adduce in proceedings relating to the contract;
• A term that imposes the evidential burden on one party in proceedings relating to the contract.

Where this will become important is in the fact that now once it is alleged that a term of a contract is unfair it is now up to the business seeking to rely on the term to prove that the clause is reasonable to protect a legitimate interest of the business.

The question you must ask when looking at your contract terms is "What is the situation that I want this clause to protect me from and will it do just enough to stop that from happening or does it go further than it needs to?"

What are you up for if one or more of your terms are unfair?

Previously, actions taken against business for unfair contract terms were brought by ASIC or the ACCC, but now anyone who is involved in a contract caught by this regime can bring the action for unfair contract terms themselves.

Penalties for businesses seeking to rely on unfair contract terms from 10 November 2022 are:

• Firstly, the term may be declared void from the first day it was included in your contracts;
• Secondly, directors of companies found to have relied on unfair contract terms, may be excluded from holding directorships for a period of time; PLUS
• For companies, the greater of:
  • $50 million;
  • If a court can work out the value you gained from relying on an unfair contract term, three (3) times that value; or
  • 30% of your total adjusted turnover for the entire period your contract included the unfair contract terms.
• For individuals up to $2.5 million.

Here are the two new kickers on the penalties:

1. Kicker Number One: A business may now receive a penalty for each individual unfair term of a contract. So not one penalty for each contract that contains unfair contract terms, but a penalty for each term in a single contract that is deemed unfair.For example: A court finds that 3 of the terms in your standard form contract are unfair. You have been relying on these terms for the last 3 years and the court feels a need to set an example and issue a maximum penalty. That will be a penalty of 3 x 30% of your total adjusted turnover for 3 full years = 90% of your total adjusted turnover for the last 3 years!
2. Kicker Number Two: Each contract you enter that contains these terms will be regarded as a separate offence.For Example (and incorporating the example above) The terms and conditions containing the 3 unfair contract terms are on your invoices/website and you did business with two other parties who also want to bring proceedings for the unfair contract terms. That would now equal 90% of your total adjusted turnover for the last three years x 3 = 270% of your total adjusted turnover over the last three years. So, forget the numbers game of hoping you are too small to come to the notice of ASIC or ACCC, any aggrieved party can kick this off and you can believe where there is one more may follow!

If things go that badly you can just fold the company and move on, right?

Another potential risk from this regime is now to the directors, as ide from potentially being excluded from holding directorships.

In passing these reforms including a one year grace period specifically for companies to assess their terms and conditions and make necessary changes, there may attach with that an inherent obligation on directors to undergo that review and potentially, if the directors do nothing and expose the company to these extraordinary penalties they may be found to be in breach of the director's duties to the company and expose themselves to personal claims for these losses suffered!

Can you or your company really afford to risk penalties potentially this high? Let Bennett & Philp Lawyers help by reviewing your standard terms on conditions today and advise you of any needed changes.

For the fixed price of $800 plus GST let Bennett & Philp Lawyers review your Standard Form Contracts and identify any potential issues and discuss your options for you and your business, including any possible tailored internal training sessions with you and your staff.

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.