New unfair contract terms reforms came into effect in November 2023. It is now unlawful for businesses to enter into standard form contracts with small businesses or consumers that include unfair contract terms.
Businesses are also prohibited from applying or relying on, or purporting to apply or rely upon, unfair contract terms in contracts entered into or renewed, or any unfair contract terms that are varied, on or after 9 November 2023.
Significant financial penalties apply for breaches of these prohibitions. Penalties can be sought by the Australian Competition and Consumer Commission (ACCC), and the state and territory fair trading agencies who also enforce the Australian Consumer Law.
What is an unfair contract term?
The reforms do not change the test for whether a term is unfair.
Under the Australian Consumer Law, contract terms in a standard form small business or consumer contract are unfair if they:
- cause a significant imbalance in the rights and obligations of the parties under the contract,
- are not reasonably necessary to protect the legitimate interests of the party advantaged by the term, and
- would cause detriment to the other party if applied or relied upon.
New penalties
Businesses now face significant penalties including the greater of:
- $50,000,000,
- if the Court can determine the value of the ‘reasonably attributable’ benefit obtained, 3 times that value, or
- if the Court cannot determine the value of the ‘reasonably attributable’ benefit, 30% of the corporation’s adjusted turnover during the breach turnover period for the contravention.
Individuals face penalties of up to $2.5 million.
ACCC report
The ACCC recently published a report which provides guidance for franchisors with respect to complying with unfair contract terms provisions in the Australian Consumer Law.
The report summarises the key findings of targeted compliance checks conducted with franchisors from a variety of industries. During the compliance checks, the franchisors’ key fact sheet, franchise agreement, and disclosure statement were assessed against the requirements of the Franchising Code of Conduct and the unfair contract terms provisions of the Australian Consumer Law.
The franchise agreements assessed contained a significant number of clauses that raised concerns including:
- Unilateral variation clauses
- Withholding and set-off payment clauses
- Audit power clauses
- Restraint of trade clauses
- Termination clauses
Guidance for ARA members
The Australian Retailers Association (ARA) understands the use of standard form contracts is common in franchising, including food retailing. We know that the majority of franchisors use their best endeavours to ensure the continued success of the franchise system, including fair and transparent contract terms.
However, we urge our members to review their franchise agreements and any other standard form consumer contracts or standard form small business contracts that they use in their business, particularly considering the five clauses identified by the ACCC.
We also encourage our members to ensure their contracts contain simple and clear language, are transparent and reasonable, and contain terms that are only as broad as reasonably necessary. Contracts should consider both points of view with counter-balancing terms included.
Finally, we recommend documenting all efforts taken to review contracts and achieve compliance, including seeking independent legal advice, and removing or amending any potential unfair contract terms.
An ARA membership includes an exclusive free 30 minute legal advisory consultation on any legal topic. To access this service, contact the ARA membership team by emailing membership@retail.org.au or phoning 1300 368 041.
