On 9 November 2023, reforms to existing legislation regulating unfair terms in standard contracts (covering both B2C and many B2B contracts) come into force. Suppliers of standardised products and subscriptions should (if they haven't already) re-evaluate their exposure under their standard terms.
What happens if a business doesn't comply?
Businesses already weren't allowed to rely on unfair terms or seek to enforce them.
But now, a court can make various orders against a supplier using unfair contract terms, including imposing large fines of up to (the greater of):
- $50 million, or
- 3 times the benefit the supplier gets from the unfair term (if the court can calculate this), or alternatively, 30% of business turnover in the 12 months prior.
Every contract with the unfair term and every reliance on an unfair term is a separate contravention of the legislation.
A court can also order a business not to use or rely on an “unfair term” in any other contract. This means that, for a standard contract, all (or most) of your other customer contracts will be affected by an "unfair term" finding.
What's covered?
The rules apply to “standard form contracts” which includes most standardised product subscription contracts (e.g. for SaaS and online subscriptions). A contract doesn't necessarily stop being "standard form" just because a customer had a chance to negotiate or a supplier agreed to change something.
Previously, an “unfair term” was just unenforceable. Under the reforms, they will now be illegal and expose a business to significant penalties.
The rules don't just apply to contracts with consumers (individuals), they also apply to B2B contracts if one party is a “small business”. But here, “small business” now includes businesses with up to 100 employees or $10m in annual turnover... so your customer need not be very small. It also no longer matters how much the contract is worth (previously, contracts below a certain threshold were not caught).
The test for whether a term is unfair, hasn't changed. At a high level, a term is unfair if it:
- could cause a significant imbalance in the parties’ rights / obligations
- isn’t reasonably necessary to protect the supplier’s legitimate interests
- disadvantages / hurts the customer in some way
Common offenders include:
- Automatic renewal terms / subscription rollover
- One-sided termination rights for the supplier
- One-sided rights for the supplier to change contract terms or pricing
- limitations on supplier liability or risk apportionment to the customer, which go too far
- Customer indemnities which go too far
- Pro-supplier terms around customer payment (especially where customer payment obligations are strict but supplier obligations to deliver are relatively relaxed, or where a customer has to pay even when services have stopped).
Many of the above concepts can still lawfully remain in a contract if properly drafted, limited and balanced with other contractual rights.
Note that other consumer laws (under the same legislation) also regulate what your contract terms can say. For example, your contract terms can’t conflict with or undermine certain statutory guarantees – some common offenders in this area include blanket “no refunds” clauses and some common supplier liability limitations / exclusions.
Even if your standard terms were originally reviewed or drafted by a lawyer, they should be revisited: the reforms were intended to change a business' risk appetite. The consequences of having “unfair terms” in contracts are now very different. Also, the definition of “small business” has expanded and previous contract value threshold requirements have been removed, so that contracts may now be caught by the regime even if they weren’t before.
What should I do now?
Review your standard terms with your legal team or contact us for a fixed price contract “health check".
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