Many schools rely on standard form contracts to avoid the time and cost of drafting and negotiating new contracts. However, because of the lack of negotiations and the usual disproportion in bargaining power between the parties, these contracts can potentially contain terms that are unfair.

While consumers are already protected against unfair contract terms under the Australian Consumer Law (ACL), new laws introduced in November last year have bolstered these protections by introducing penalties for relying on unfair contract terms. This mean that schools will need to review their standard form contracts to ensure that they do not risk incurring heavy fines. Here’s what you need to know about these changes.

What Is the ACL?

The ACL, which is set out in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA), is a national law that provides consumers with certain rights and protections. These include specific protections such as forbidding unfair trading practices and providing consumer guarantees for goods and services. They also include general protections such as prohibiting misleading or deceptive conduct, unconscionable conduct and the use of unfair terms in standard form contracts.

What Has Changed?

One of the main changes to the ACL has been to the unfair contract terms provisions. The changes to the ACL now allow courts to impose a monetary penalty if a person proposes, applies, relies or purports to apply or rely on an unfair contract term. The penalty for body corporates is not to exceed the greater of $50 million, three times the value of the benefit obtained by the body corporate, or 30% of the body corporate’s adjusted turnover during the breach turnover period. For persons that are not body corporates, the penalty is not to exceed $2.5 million.

These changes are intended to further deter someone from using unfair contract terms in standard form contracts. Prior to these amendments, an unfair term could be rendered void in certain standard form contracts, however, a person could not be penalised for including or relying on an unfair term.

Importantly, these laws only apply to consumer contracts (contracts for the supply of goods or services to an individual that is wholly or predominantly for personal, domestic or household use or consumption) and small business contracts. Additionally, the contract must be a standard form contract (this is explained further below in the article).

The definition of “small business contract” has also changed to increase the type of contracts that are covered by the unfair contract term provisions under the ACL. A contract is now considered a small business contract if at least one party to the contract is a business that employs fewer than 100 persons and/or they have an annual turnover of less than $10,000,000, regardless of the value of the contract. Previously, at least one party had to employ fewer than 20 persons and the upfront price payable under the contract had to be either less than $300,000, or less than $1 million if the contract had a duration of more than 12 months. This means that certain small business contracts will now also be captured by the unfair contract terms provisions.

In addition to these changes, courts will also be given further powers in relation to the orders that they can make with respect to unfair contract terms.

When Are Contract Terms “Unfair”?

A term of a consumer contract or small business contract is unfair if:

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The CCA provides examples of unfair terms. A term may be unfair if it:

• permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract or to terminate the contract
• penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract
• a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract or renew or not renew the contract
• a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract
• a term that permits, or has the effect of permitting, 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 or one party’s right to sue another party.

In determining whether a term of a contract is unfair, a court will consider the contract as a whole. They will also consider the extent to which the term is expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term.

The unfair contract terms laws do not apply to a term of a contract to the extent, but only to the extent, that the term:

• defines the main subject matter of the contract
• sets the upfront price payable under the contract
• is required, or expressly permitted, by a law of the Commonwealth or of a State or Territory.

What Are Standard Form Contracts?

The unfair contract terms provisions under the ACL only apply to standard form contracts.

Standard form contracts are contracts that are prepared by a party and usually not negotiated. They are essentially “take it or leave it” contracts whose repeated use can save businesses time and money. Many people encounter standard form contracts when they sign up for a gym membership or a phone plan, or in a school context, sign an enrolment agreement.

When determining whether a contract is a standard form contract, a court will consider things such as whether:

• one of the parties has all or most of the bargaining power relating to the transaction
• one of the parties has made another contract, in the same or substantially similar terms, prepared by that party, and, if so, how many such contracts that party has made
• the contract was prepared by one party before any discussion relating to the transaction occurred between the parties
• another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented
• another party was given an effective opportunity to negotiate the terms of the contract
• the terms of the contract take into account the specific characteristics of another party or the particular transaction.

A contract may be determined to be a standard form contract despite the existence of one or more of the following:

• an opportunity for a party to negotiate changes, to terms of the contract, that are minor or insubstantial in effect
• an opportunity for a party to select a term from a range of options determined by another party
• an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

What Should Schools Do Now?

If schools enter into or renew a standard form contract, or vary a term in an existing contract, they will need to be mindful of these new changes or risk incurring a heavy penalty. Accordingly, schools should carefully review any existing or new standard form contracts to ensure that they do not propose, apply, rely or purport to apply or rely on, an unfair contract term.