Drastic changes to the unfair contract terms regime are looming - is your business ready?

On 9 November 2023, the law dealing with unfair contract terms in Australia will drastically change and businesses will risk significant penalties if their standard form contracts include unfair terms.

Before the changes come into effect on 9 November 2023, businesses should:

What is the ‘unfair contract terms’ regime?

The term ‘unfair contract terms regime’ broadly describes laws that deal with unfair terms in contracts.

This article focuses on the Australian Consumer Law (ACL) set out in Schedule 2 of the Competition and Consumer Act 2010 and the Australian Securities and Investments Commission Act 2001 (ASIC Act), which include provisions dealing with unfair terms in certain contracts. References in this article to the ‘unfair contract terms (UCT) regime’ concern the provisions in these Acts.[1]

The UCT regime currently provides that where a court finds a term is ‘unfair’ in certain standard form consumer contracts or small business contracts, the term is void. However, significant changes to the UCT regime come into effect on 9 November 2023.[2] These changes, which are considered in detail later in this article, substantially expand the scope of the UCT regime and introduce financial penalties for non-compliance.

Who does the UCT regime apply to?

The UCT regime applies to all businesses that use standard form contracts in dealings with consumers and small businesses to:

• supply goods or services;
• sell or lease land; or
• supply financial services or financial products.

The ACL provisions address unfair terms in standard form contracts for goods, services and the sale or grant of an interest in land. The equivalent ASIC Act provisions address unfair terms in standard form contracts for financial products and services.

What is a ‘standard form contract’?

The court will determine whether a contract is a ‘standard form contract’ on a case-by-case basis. However, in making that determination the court must take the following matters into account: [3]

• whether one party has all or most of the bargaining power relating to the transaction;
• whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
• whether another party was required either to accept or reject the terms of the contract in the form in which they were presented;
• whether another party was given an effective opportunity to negotiate the terms of the contract; and
• whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

If a party alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party proves otherwise.

The changes to the UCT regime taking effect on 9 November 2023 will clarify and broaden the existing definition of a standard form contract. This is addressed below.

What is an ‘unfair’ contract term?

A term in an applicable standard form contract is unfair if it:

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

Examples of terms that may be unfair are terms that permit one party (but not the other) to:

• avoid or limit performance of the contract;
• terminate the contract;
• vary the terms of the contract;
• renew or not renew the contract;
• vary the upfront price payable under the contract without the right of another party to terminate the contract;
• unilaterally to determine whether the contract has been breached or to interpret its meaning; or
• assign the contract to the detriment of another party without that other party’s consent.[4]

Further examples of potentially unfair terms are terms that:

• penalise one party (but not the other) for a breach or termination of the contract;
• limit one party’s vicarious liability for its agents;
• limit one party’s right to sue another party;
• limit the evidence one party can adduce in proceedings relating to the contract; or
• impose the evidential burden on one party in proceedings relating to the contract.[5]

In recent Federal Court proceedings brought by the ACCC against Fujifilm,[1] the court found that thousands of contracts Fujifilm had entered into with small businesses contained unfair terms, which it deemed void and unenforceable. In these proceedings the court identified the following specific types of terms that it found to be unfair:[1]

What changes to the UCT regime are coming into effect on 9 November 2023?

Some of the more critical changes to the UCT regime coming into effect on 9 November 2023 are:

Broaden the class of contracts covered regime by

• expanding the definition of small business; and
• removing the contract value threshold for contracts under the ACL and raising the value threshold for contracts regulated by the ASIC Act.

Prohibit unfair contract terms

• Under the current UCT regime a court can only determine an unfair term in a standard form contract is void and therefore unenforceable. Under the new UCT regime the proposal of, use of, application of, or reliance on, unfair contract terms in a standard form consumer or small business contracts is prohibited.

Introduce civil penalty provisions for breaches

• Significant pecuniary penalties may be applied to businesses found to have breached the UCT provisions.

A more detailed comparison table setting out the changes to the current law coming into effect on 9 November 2023 can be accessed via this link.

Pecuniary penalties

Whilst the maximum civil penalties that can be applied under the new UCT regime are large, they are the maximum available and are considered by the Government to be appropriate in size for bigger companies, as they provide an adequate deterrent to breaches of the unfair contract terms provisions.

Under the ASIC Act the courts must consider factors including ‘the nature and extent of the contravention’ and ‘the circumstances in which the contravention took place’ and impose a penalty that is appropriate in the circumstances, including below the maximum penalty. The court must consider similar matters under the ACL.

The civil courts are experienced in making civil penalty orders at appropriate levels having regard to the maximum penalty amount, taking into account a range of factors including the nature of the contravening conduct and the size of the organisation involved.

Therefore, a relevant consideration in setting a civil penalty amount is the maximum penalty that should apply in the most egregious instances of non-compliance with the new unfair contract terms provisions.

The maximum civil penalty amounts that can be imposed under these new provisions are intentionally significant and are in line with the penalties for other breaches of the ACL and the ASIC Act.

Why do the changes matter?

The broader scope of the new UCT regime will capture far more standard form contracts and the introduction of civil penalties for contravening the prohibitions on unfair contract terms means many businesses will face a considerable risk by using standard form contracts.

Below we identify some of the specific changes introduced by the new UCT regime that we consider businesses should be mindful of.

Broader scope - contravention on  proposing  unfair terms

When the UCT reforms come into force it will be unlawful to propose an unfair term in a standard form consumer or small business contract.

Accordingly, a business may be in contravention of the prohibition on unfair contract terms even if its proposed standard form contract is not accepted and agreed.

Penalties for each breach

The introduction of pecuniary penalties for contravention of the provisions is a dramatic shift from the current position where a term found to be unfair term is only deemed void.

Exacerbating the risk that businesses face by using standard form contracts is the fact that pecuniary penalties can be imposed for each contravention of the new UCT regime.

Accordingly, each individual unfair term contained in a standard form contract is considered a separate contravention and, as a result, a business can be found to have multiple contraventions in a single contract.

Whilst this could result in a high theoretical maximum penalty, a court will apply existing principles regarding the assessment of the pecuniary penalty to be imposed, to ensure that the total quantum of penalties is appropriate.

Enforcement

The ACCC has long advocated for the introduction of penalties to unfair contract terms.[6]

The enacting legislation for the UCT reforms received royal assent (became law) on 9 November 2022 and gave businesses 12 months to prepare for the UCT regime changes. Given this transition time, the regulators are unlikely to be sympathetic towards businesses that have not prepared for the impending changes.

Both the ACCC and ASIC have stated they will prioritise enforcing the unfair contract terms regime in 2023 and 2024[7] and businesses should expect the regulators to be proactive in scrutinising standard form contracts and taking enforcements terms against those businesses seeking to impose unfair terms.

Will your standard form contracts be caught by the new UCT regime?

We suggest using this flow chart to consider if the new UCT regime will apply to your contracts and, if they do, to help assess whether those contacts contain, or may contain unfair terms. Please click on the image below to download the flow chart.

Conclusion

As the implementation date of 9 November 2023 approaches it is crucial for businesses to review their standard form contracts and ensure compliance with the new requirements. Likewise, consumers and small businesses should familiarise themselves with their rights and remain vigilant against any potentially unfair contract terms.

If you have any questions or queries regarding the changes to the unfair contract terms regime please contact Marcus Pullen at +61 8 9426 6831 or mpullen@jacmac.com.au.

Disclaimer: Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not act in reliance on the information provided in this without first obtaining legal advice.
 

[1] There are various other laws in Australia that deal with unfair terms in contracts, which are not covered by this article, such as the Independent Contractors Act 2006 (Cth).

[2] Made by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth).

[3] Section 27 of the ACL; section 12BK of the ASIC Act.

[4] Section 25 of the ACL; section 12BH of the ASIC Act.

[5] Ibid.

[6] ACCC media release 1 November 2022: "ACCC welcomes new penalties and expansion of the unfair contract terms laws”.

[7] ACCC 2023–24 Compliance and Enforcement Priorities; ASIC Enforcement priorities for 2023.