Changes to unfair contract terms

The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Amending Act) received royal assent on 9 November 2022, introducing significant amendments to the Australian Consumer Law (ACL).  These amendments target the Unfair Contract Terms (UCT) provisions of the ACL, strengthening the rights of consumers while imposing stricter requirements on businesses using Standard Form Contracts (SFC).

Overview on unfair contract terms

Laws concerning UCTs were introduced when the ACL came into force on 1 January 2011 and replaced the Trade Practices Act 1974 (Cth).  The ACL is contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA) and is applied as legislation for Commonwealth, State, and Territory consumer protection.  The laws were introduced with the purpose of preventing abuse by unfair terms in non-negotiable small business contracts (Standard Form Contracts).

What are unfair contract terms?

UCTs are clauses in non-negotiable contracts that attempt to leverage a business’ position of power over a consumer.  A term is considered an ‘unfair contract term’ if it is included in a SFC and satisfies all the following:

• it causes a significant imbalance in the rights and obligations of parties under the contract;
• it is not reasonably necessary to protect the legitimate interests of the party advantaged by the contractual term; and
• it causes detriment or significant disadvantage to the other party.

What are standard form contracts?

There is no single definition of a SFC, however certain characteristics help identify such contracts.  An SFC is prepared by one party and there is typically no form of negotiation between the parties of the contract.  An SFC is offered on a ‘take it or leave it’ basis.  Examples where SFCs are commonly used include companies that provide subscription services, telecommunication services, and internet provider services.

When determining if an SFC exists a court will consider whether a contracting party:

• has all or most of the bargaining power in the transaction;
• prepared the contract without or before any discussion between the parties about the transaction;
• could effectively only either accept or reject the terms of the contract as presented;
• was given any real opportunity to negotiate the terms of the contract; and
• whether the terms of the contract account for any specific features of the other party or the transaction.

Amended provisions

Schedule 2 of the Amending Act aims to reduce the prevalence of UCTs in both consumer and business contracts by altering the regime regarding UCTs in several other pieces of legislation including:

• the CCA, and its schedule of the ACL; and
• the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

Key changes

Section 47 of the Amending Act, contained in Schedule 2, alters the previous definition of a small business contract in the ACL.  Previously, a small business contract was considered a contract with an upfront price payable not exceeding $300,000.00 (or not exceeding $1 million if the contract period surpassed twelve (12) months).  The changes alter section 23(4) of the ACL and a small business contract now exists if at least one party to the contract:

• employs fewer than 100 persons; or
• has an annual turnover of less than $10 million.

The  ASIC Act is also amended by section 49 of the Amending Act, contained in Schedule 2, which replaces the previous definition of small businesses contract.  The amendments to the ASIC Act at subsections 12BF(4), (5) and (6) mean that a contract is considered a small business contract if the upfront contract price does not exceed $5 million and one party either:

• employs fewer than 100 persons; or
• its most recent annual turnover before the contract was made was less than $10 million.

The new monetary thresholds have broadened the scope of small business contracts and encompass any standard form contract for goods or services where one party to the contract is a small business under the altered laws.

Penalties for every instance

Courts currently possess the authority to enforce significant penalties for every instance involving reliance upon, inclusion or proposal of an UCT.  This marks a departure from the previous legislative framework, which solely allowed courts to nullify UCTs or prevent a party relying on the specific contract clause.  It also means that the offending party may be fined merely for including an UCT in the contract even if it does not seek to rely on the UCT.

Penalties for businesses

Companies should be cognisant of the maximum penalties that now apply, including:

• maximum fines of $50 million; 
• an amount three times the value of the benefit derived from the conduct that is ‘reasonably attributable’ in the case (if that is ascertainable by the Court); or
• an amount equal to thirty (30) percent of the adjusted turnover during the breach period in instances where the court cannot ascertain the benefit.

Penalties for individuals

Individuals may now also face a maximum penalty of $2.5 million.

Advice to businesses

Businesses are strongly encouraged to obtain legal advice to review their contracts and avoid inadvertently being exposed to the new penalties.  Businesses should amend their standard forms and small business contracts to conform to the amended legal framework.  This includes:

• new contracts entered into from 9 November 2023; and
• existing contacts that are varied or renewed on or after 9 November 2023.

Links and further references

Legislation

Competition and Consumer Act 2010 (Cth)

Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth)

Further information about unfair contract terms

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Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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