Unfair Contract Terms: What Online Businesses Need to Know

Have you ever signed an online contract without fully reading or understanding its terms and conditions? 

If so, you’re not alone. 

Many people, from those running small businesses to vulnerable individuals, lack the knowledge, ability, time, resources, bargaining power, and patience to effectively review and negotiate terms of standard form contracts.

Some companies flatly refuse to consider changes and respond along the lines of “those are our standard terms, take it or leave it”. That approach is becoming risky.

In an attempt to try and level the playing field a little, the Federal Government recently passed a law  (Treasury Laws Amendment (More Competition, Better Prices) Act 2022), which updates the Australian Consumer Law (ACL) to enable the Courts to levy penalties on businesses for including unfair contract terms in standard form and small business contracts. 

If you have previously paid very little attention to your standard form contracts, or ‘adopted’ them from someone else, or had them given to you by a well-meaning colleague, now is the time to review. If you don’t review your established business practices you face potentially being held liable for quite severe penalties for seeking to impose, or enforce, any unfair contract terms. 

Previously, the Courts could only declare specific terms of a contract unfair and void, but because unfair terms were not prohibited by law, the Court could not impose any penalties. Now they can. 

It is expected that individuals and small businesses will have stronger bargaining powers as a result of these changes. A small business is one that employs fewer than 100 people or has an annual turnover of less than $10 million – so the majority of Australian businesses.  

This still means you either have to go to court, or be taken to court, for these new penalties to be imposed. 

A business will be found to have breached the law (s.23(2A) ACL) if:

   (a)  the person makes a contract; and

   (b)  the contract is a consumer contract or small business contract; and

   (c)  the contract is a standard form contract; and

   (d)  a term of the contract is unfair; and

   (e)  the person proposed the unfair term.

At the same time the penalties for breaches such as false or misleading representations, coercion, unconscionable conduct, supplying products that do not comply with established standards, and harassment have attracted maximum penalties for individuals of $2,500,000 and for companies at $50,000,000. Other calculations may be applied, as set out below 

This means that all businesses, including those businesses mainly online, will need to be more attentive in reviewing and amending their standard form contracts to avoid breaching the revised laws and inadvertently incurring severe penalties.

As a business, you have until 10 November 2023 to review and amend your standard form contracts.

As a business, you have until 10 November 2023 to review and amend your standard form contracts.

But What Exactly Is An Unfair Contract Term?

An unfair contract term, according to the ACL, is one that causes an unreasonable or unnecessary imbalance between the parties’ rights and obligations under the contract. An unfair contract term protects one party whilst the other party bears all or most of the risk and cannot negotiate their position. So, a ‘take it or leave it’ approach to contracts. 

Unfair contract terms could also include clauses that are not reasonably necessary to protect one party’s legitimate interests and would cause financial or other detriment to the other party if relied upon. 

Examples of unfair contract terms include allowing one party to terminate, amend, or renew the contract while the other cannot. Other examples include allowing one party to vary the price, goods, or services without the other party’s consent or ability to end the contract if they disagree. 

Consider an example of an online subscription product where the company providing the product unilaterally decides to increase the monthly plan without your consent. You have a power imbalance, with little ability to negotiate a lesser plan. The increase might even apply without you realising it – even if the business provided notice via email before the change. Not everyone gets through their emails… 

Unfair contract terms have always been prohibited and the amendments to the ACL do not change the definitions or considerations of defining unfair contractual terms; instead the amendments affect how those contract terms are dealt with and the increased penalties. 

The situation used to be that if you felt there were unfair contract terms in an agreement, you had to go to court to get an order saying the terms were unfair and therefore void. Now, the Court also has the ability to levy penalties. 

Contract terms which the courts have previously considered to be unfair include those which:

• give rise to an imbalance between the parties’ rights and obligations
• are not necessary to protect any one party’s legitimate interests in a contract or project
• allow one party but not the other to limit the performance required under the contract
• penalise one party but not the other for breaches of the contract
• allow one party but not the other to renew the contract
• allow one party to vary the contract with the other party having a right to terminate for breach
• allow one party to vary the price or goods or services without the other parties’ consent
• allow one party to terminate on a wide range of reasons and which may have significantly adverse consequences for the other party

Maximum Penalties

Does your business have the greater of $50 million, or 3x the value of the benefit obtained, or, if the value of the benefit cannot be determined, 30 per cent of your business turnover during the period you engaged in the conduct?

Those are the maximum penalties for a company if it is found to have imposed unfair contract terms. 

For individuals, it is $2,500,000.

If you are a sole trader, can you afford $2,500,000?

Fines have also been increased for breaching the Competition and Consumer Act 2010 (CCA). For example, a finding of anti-competitive behaviour can carry maximum penalties of up to $50 million or three times the value of the benefit obtained, or, if the value derived from the breach cannot be determined, 30 per cent of the company’s turnover during the period it engaged in the conduct, whichever is greater. No business can afford to take these unnecessary risks.

In addition to these penalties, the courts have the power to void, amend, or refuse to enforce part or the whole contract to remedy the loss suffered by the wronged party. 

If a particular clause is deemed to be unfair, the court may also stop a party from including similar unfair terms in future standard or small business contracts. 

Online businesses of all sizes and industries are at risk of breaching the revised legislation, but those that using standard form contracts are particularly exposed. To avoid these risks, all small businesses including online businesses should review their standard form contracts, obtain legal advice if necessary, and amend any outdated or unfair terms before the 12-month respite period ends on 9 November 2023.

These changes to the ACL seek to limit the negotiation power imbalance between parties in the standard form and small business contracts. 

They aim to prevent companies or individuals from taking advantage of unfair contract terms and penalising those who do. As an online small business owner, it’s important to be aware of the changes and take action to ensure that your standard form contracts comply with the revised legislation. 

Now is the time to review and revise any standard form contracts you may have!