In November 2023, the 12-month transition period for the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 ("the Act") comes to a close. As we reflect on the impact of this act, it becomes even more crucial to understand the ins and outs of standard form contracts and in particular to understand "What is a standard form contract?".
Standard Form Contracts
ACCC reference to Standard Form Contracts
What is a Standard Form Contract under the ACL?
What does the Explanatory Memorandum say about Standard Form Contracts?
Takeaways
standard form contractS
A standard form contract is generally referred to as a contract that has pre-drafted terms and conditions that can be easily adapted to different transactions or agreements. This eliminates the need for extensive negotiations and allows parties to quickly and efficiently enter into contracts.
Examples of standard form contracts include software licence user agreements where you tick a box to indicate that you agree to the terms and conditions of use.
how does the accc currently define a standard form contract?
The ACCC in its guide "Unfair contract terms - A guide for businesses and legal practitioners" states:
The unfair contract terms laws do not define 'standard form contract'. However, in broad terms, a standard form contract will typically be one that has been prepared by one party to the contract and is not subject to negotiation between the parties - that is, it is offered on a 'take it or leave it' basis.
What is a Standard form contract under the Australian Consumer Law?
The Australian Consumer Law ("the ACL") does not answer the question "What is a standard form contract?".
Section 27(1) of the ACL creates a rebuttable presumption that a contact is a standard form contract once that allegation is made. Consequently, once a party claims that a contract is a standard form contract, the contract is presumed to be a standard form contract unless it is shown in the circumstances not to be a standard form contract.
Section 27(2) of the ACL provides that when determining whether a contract is a standard form contract, a court may take into account such matters as it thinks are relevant, but must take into account:
- whether one of the parties has all or most of the bargaining power relating to the transaction (s27(2)(a));
- whether the contract was prepared by one party before any discussion relating to the transaction took place (s27(2)(b));
- whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)), in the form they were presented (s27(2)(c));
- whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1) (s27(2)(d));
- whether the terms of the contract (other then those referred to in s26(1)) take into account the specific characteristics of another party or a particular transaction (s27(2)(e));
- any other matter prescribed by the regulations (s27(2)(f)).
Schedule 2 of the Act (which comes into effect from 9 November 2023), introduces a further factor being:
- whether one of the parties has made another contract, in the same or similar terms, prepared by that party, and, if so, how many such contracts that party has made.
In addition, Schedule 2 of the Act introduces a new section 27(3) which clarifies that a contract may be determined to be a standard form contract despite the existence of one or more of the following:
(a) an opportunity for a party to negotiate changes, to terms of the contract, that are minor or insubstantial in effect;
(b) an opportunity for a party to select a term from a range of options determined by another party;
(c) an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.
In Qamaruddin v Kolak Living Pty Limited (Civil Dispute) [2017] ACAT 45 the tribunal stated in relation to the alleged standard form contract:
On the balance of evidence, and having taken into account all the matters set out in section 27(2), I am not satisfied that Kolak Living has rebutted the presumption that the contract was a standard form contract for the following reasons:
(a) The terms of the contract are encapsulated in the What's Next document; and that document was prepared by Kolak Living before any discussion relating to the transaction occurred between the parties.
(b) I prefer Ms Qamaruddin's evidence that she was not given an effective opportunity to negotiate the terms of the contract (other than those terms referred to in section 26(1)).
(c) The terms of the contract (other than those terms referred to in section 26(1)) do not take into account the specific characteristics of Ms Qamaruddin or the particular transaction.
(d) Potential customers were all given the What's Next document when they expressed an interest in a particular house and land package. Nothing in the document suggests or invites negotiation.
Let's consider each of the factors SET OUT IN THE ACL:
The relative bargaining power of the parties - s27(2)(a) of the ACL:
A Court will assess the level of negotiation and power imbalance between the parties. If one party has significantly more power and control over the terms of the contract, it may indicate that the contract is a standard form contract.
In ACCC v Servcorp Limited [2018] FCA 1044 the Court was satisfied that the contracts were standard form contracts because:
- their terms were prepared by Servcorp; and
- Servcorp had most of the bargaining power as the Servcorp Base Terms were prepared prior to any discussion between the parties and Servcorp presented the terms without inviting the counterparty to negotiate those terms, other than the terms defining the main subject matter of the contract, namely its length, the location of the office space and the upfront price payable.
The Court appeared to take the view that the fact that Servcorp had prepared the base terms was to be taken into account when assessing the relative bargaining power of the parties.
In AIBI Holdings Pty Ltd v Virtual Technology Services Pty Ltd [2022] FCA 696 a different approach was considered. In AIBI it was submitted that when the parties were initially dealing with each other, the parties had equal bargaining strength, despite VTS preparing the terms and conditions. Perrum J said at [65]:
Mr Soon accepted that when AIBI was dealing with VTS in relation to the first agreement, the parties had equal bargaining strength which I accept. Presented with VTS' proposed terms and conditions, AIBI could have elected not to deal with VTS.
Perram J in AIBI further stated in relation to assessing the relative bargaining strength of the parties at [86]:
In assessing the relative bargaining position of the parties, it is appropriate to take into account the legal position in which they found themselves. It is also relevant to consider the actual course the negotiations took.
In AIBI it was alleged that the third contract entered into by the parties was a standard form contract. The third contract involved different circumstances to the first contract (where the Court accepted that the parties had equal bargaining strength). At the time the third contract was negotiated, the parties were already bound to each other by the terms of the second contract. The Court considered the circumstances and found at [89]:
The legal framework in which the negotiations took place is therefore apt to suggest a greater level of bargaining power on the part of VTS ... I conclude therefore that VTS had the upper hand in terms of bargaining power but that it was not an overwhelming advantage.
Whether the contract was prepared by one party before any discussion took place - s27(2)(b) of the ACL:
If one party has already drafted the contract without any input from the other party, it suggests that the contract is a standard form contract. This is often the case in situations where one party presents a pre-drafted contract to the other party for acceptance.
In AIBI at [91] the Court took into account emails that had passed between the parties in relation to the pricing structure as evidence that:
whilst the contract was prepared by VTS, it is not open to say that this took place without any prior discussion between the parties.
Consequently, the Court in AIBI took the view that the contract was not prepared by one party, before any discussion took place.
A similar approach was taken by Stevenson J in Naegeli v Dalton and Schaeffer as Executors of the Estate of the late John Herman Schaeffer [2023] NSWSC 466 (Naegeli) at [369(b)], when considering whether a guarantee was a standard form contract:
"although the Guarantee was prepared by Mr Naegeli in the circumstances to which I have referred, it did not take place "before any discussion relating to the transaction" but, rather, after both Mr Blinkworth and Mr Schaeffer assured Mr Naegeli that they would assume personal responsibility for CRB's debt, both readily agreed to execute a guarantee, and after they invited Mr Naegeli to prepare a form of guarantee for their execution".
Whether the contract was offered on a "take it or leave it basis" - s27(2)(c) of the ACL:
If one party presents the contract to the other party with little or no opportunity for negotiation or amendment, it indicates that the contract is a standard form contract. This commonly occurs in situations where the terms of the contract are non-negotiable and the other party must either accept or reject the contract as a whole.
In AIBI at [92] Perrum J stated in relation to this factor:
As I have explained above it was Ms Mao's impression that she was not prevented from seeking to negotiate the non-price terms. However, I do not think that Ms Mao's subjective understanding of the situation is relevant to the questions posed by s27(2)(c). I do not think, objectively viewed, that AIBI had to accept or reject the terms of the third agreement. So to conclude would be to ignore the fact that Ms Mao had successfully negotiated a superior price structure in the email of 1 October 2019.
It is important to note when considering this factor that the terms of the contract referred to in section 26(1) of the ACL cannot be taken into account.
Section 26(1) of the ACL includes terms that:
(a) define the main subject matter of the contract; or
(b) set the upfront price payable under the contract; or
(c) are terms required, or expressly permitted, by a law of the Commonwealth, a State or a Territory.
Consequently, if a party has negotiated the main subject matter of the contract and the upfront price payable, but has not been given the opportunity to negotiate the other terms, the contract is likely to have been offered on a "take it or leave it" basis.
In Servcorp as set out above, at [37(2)] Markovic J took the view that the "main subject matter of the contract' was "its length, the location of the office space and the upfront price payable".
ASIC in its information page Unfair contract term protections for consumers, sets out that the: 'main subject matter' of a contract is the product or service acquired under the contract (i.e. the basis for the existence of the contract)'.
Further in relation to the terms that set the upfront price payable under the contract, ASIC on the same information page provides: "The 'upfront price payable' is the amount disclosed to the consumer for supply of the product or service at or before the time the contract is entered into. It does not include fees and charges for something that may or may not happen during the contract.'"
The extent to which another party was given an effective opportunity to negotiate the terms of the contract - s27(2)(d) of the ACL:
A Court will consider whether the party had a reasonable opportunity to negotiate or influence the terms of the contract. If one party had limited or no opportunity to negotiate, it suggests that the contract is a standard form contract.
Stevenson J in Naegeli took the following approach in relation to this factor at [369(h)]:
... Mr Naegeli did nothing to impede Mr Schaeffer having an opportunity to negotiate any terms of the Guarantee, and Mr Schaeffer's statement to Mr Naegeli immediately after his execution of the Guarantee, does not suggest that Mr Schaeffer considered he had been deprived of an effective opportunity to negotiate the terms of the Guarantee.
Again, it is important to note when considering this factor that the terms of the contract referred to in section 26(1) of the ACL cannot be taken into account.
In Servcorp, the Court took the view that the party was not given an effective opportunity to negotiate the terms of the contract, as it took the view that the length of the contract and the location of the office space (both being terms that the parties negotiated), formed the main subject matter of the contract.
Whether the terms of the contract take into account the specific characteristics of another party or a particular transaction - s27(2)(e) of the ACL:
A Court will consider whether the terms of the contract take into account the specific characteristics of another party or a particular transaction. If the terms of the contract are standard terms and do not take into account the specific characteristics of another party or a particular transaction, the contract is more likely to be a standard form contract.
When considering whether the contract took into account the specific characteristics of another party, the Court in AIBI stated at [94]:
In this case, the terms of the agreement take into account the number of servers and computers for which AIBI required support. It is also took into account Ms Mao's request for a price reduction.
Stevenson J in Naegeli took a different approach at [369(i)] stating:
it is not in the nature of guarantees that they "take into account the specific characteristics" of the surety.
In both of the above cases, the contract was held not to be a Standard Form Contract.
As with s27(2)(c) of the ACL and s27(2)(d) of the ACL, it is important to note that the terms referred to in section 26(1) of the ACL cannot be taken into account when considering this factor.
what does the explanatory memorandum say about standard form contracts?
The Explanatory Memorandum to the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 ("the Bill") does not define a standard form contract.
The Explanatory Memorandum however states that the Bill amends the ACL (the CCA and the ASIC Act) to strengthen and clarify the existing unfair contract terms provisions.
The Explanatory Memorandum further states that Schedule 2 to the Bill clarifies and strengthens the unfair contract terms provisions generally by:
- ensuring that repeat usage of a contract must be taken into account by a
court when determining whether a contract is a standard form contract; - clarifying that a contract may still be a standard form contract despite
there being an opportunity for:- a party to negotiate changes that are minor or insubstantial in
effect; - a party to select a term from a range of options determined by
another party; - a party to another contract or proposed contract to negotiate terms
of the other contract or proposed contract.
- a party to negotiate changes that are minor or insubstantial in
While from 9 November 2023, repeat usage of a contract must be taken into account when determining whether a contract is a standard form contract, the factor is not determinative and will need to be balanced with the other factors.
Takeaways
Given the upcoming changes to the Unfair Contract Terms regime, it is important to consider whether your contracts are standard form contracts under the ACL.
The traditional approach of determining whether a contract was presented to a party as a "take it or leave it" offer is no longer the determining factor. The weight that the Court will give to the "repeat usage of a contract" is currently uncertain. It is also unclear as to how this factor will be applied in cases where a party has had the opportunity to engage in negotiations or make modifications to the contract.
Consequently, it is important to review your processes and procedures. If your contracts are standard form contracts, it is crucial that your contracts do not contain unfair contract terms, particularly given the penalty provisions which apply from 9 November 2023.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.
