Amendments to unfair contract terms in Australia

In October 2022, the Australian Federal Parliament passed substantial amendments to Australia’s laws on unfair contract terms (UCT) in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (the Australian Consumer Law – ACL) and the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act). New prohibitions and penalties were introduced in relation to making a standard form contract containing an unfair term, or applying or relying on an unfair term. The change has also broadened the definition of “small business contract” with the effect that more contracts will fall within the regime.

The amendments came into effect on 9 November 2023. From that date, entering into and applying or relying on (or purporting to apply or rely on) an unfair term in a standard form consumer or small business contract will be illegal, and will attract significant pecuniary and non-pecuniary penalties. Therefore, it is important for businesses to understand the amendments and assess whether any of their contracts will now fall within the regime.

In addition, more contracts will be caught by an expanded definition of what constitutes a “small business contract”. This may include contracts with subsidiaries in related a Body Corporate of large entities, if they fall under the head count of turnover thresholds (which I will touch on shortly). The Australian Competition and Consumer commission (ACCC) has identified unfair contract terms as a priority and has moved to enforcement of the regime from 9 November 2023. ASIC has also prioritised enforcement of this regime and identified the insurance and credit sectors as an initial focus.

What type of contracts do the laws apply to?

The unfair contract terms regime applies to:

• Standard form contracts
• Contract for the supply of goods or services (or financial products or services under the ASIC Act), or for the sale or grant of an interest in land.
• Where the contract is a consumer contract or small business contract; and
• In relation to financial products and services contracts, with an upfront price payable of less than $5 million.

Exclusions from the regime

Exclusions include:

• Terms that define the main subject matter of the contract
• Terms that set the upfront price payable under the contract
• Terms required or expressly permitted by law of the Commonwealth, a state or territory or included in the contract by operation of the law of the Commonwealth, a state or territory that regulates the contract
• Certain life insurance contracts; and
• Some other limited exceptions

Is it a standard form contract, consumer contract or a small business contract? What is the difference?

• “Standard form contract” is not defined in the ACL but is a form with standardised terms and conditions used by businesses for multiple people. Factors to be considered in determining whether a contract is standard form include:

1. Does the business have a dominant bargaining position in its dealings?
2. Was the contract prepared by the business prior to contractual discussions?
3. Whether the other party has an effective opportunity to negotiate or whether the contract was offered on a “take it or leave it” basis?
4. Do the terms of the contract take into account the specific characteristics of the other party or the particular transaction?
5. The number of times the business has entered into the contract on the same or substantially similar terms.

Importantly there is a rebuttable presumption recognized by the Courts that an agreement is a standard form contract, so the onus will be on the party seeking to argue that it is not standard form.

• “Consumer contract” – is a contract for the supply of goods or services or a sale or grant of an interest in land to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.
• “Small business contract” is a contract for the supply of goods or services or a sale or grant of an interest in land where at least one party satisfies either or both of the following conditions:

1. At the time of entering into the contract, the party employs fewer than 100 persons; or
2. The party’s turnover in the last income tax year (as set out in the Income Tax Assessment Act 1997) that ended at or before the time the contract was made is less than $10 million.

Importantly, the criteria of less than 100 employees or less than $10 million turnover relates to the party to the contract. As a result, you should appreciate that some contracts with subsidiaries or related Body Corporates of large businesses will be captured under the definition of “small business contract”.

Under the ASIC Act, slightly different criteria apply. As well as the head count or turnover requirements, contracts must be a financial product or for the supply of financial services (as defined in the ASIC Act) and must have an upfront price of less than $5 million.

The meaning of “small business contract” set out above is significantly expanded from the previous definition which required fewer than 20 employees and an upfront price of less than $300,000 or $1 million in the case of a multi-year contract. The definition of “small business contract” in the ACL will no longer contain a transaction value limb.

Unfair Contract Terms

The following three conditions must be satisfied (UCT Test):

1. The term creates significant imbalance in the parties’ rights and obligations under the contract;
2. The term is not reasonably necessary to protect the legitimate interests of the advantaged parties – rebuttable presumption and the onus is on advantaged party to show why the term is necessary to protect its legitimate interests;
3. The term would cause detriment (whether financial or otherwise) to the disadvantaged party if it were applied or relied on.

In applying the above, the court may take into account such matters it sees fit (Eg. pre-contractual conduct and consumer choice when presented with alternative options), however, a Court must take into account:

1. The extent to which the term is transparent; and
2. The contract as a whole.

The term is transparent if it is:

• Expressed in reasonably plain language;
• Legible;
• Presented clearly; and
• Readily available to any party affected by the term.

Importantly, it should be understood that a term that is clear and transparent can still be found to be unfair.

What is prohibited?

Entering into a standard form consumer contract or small business contract is illegal if contains an unfair term. Similarly, applying or relying on an unfair term in a standard form consumer contract or small business contract is illegal.

Significant penalties for unfair contract term contraventions.

The changes introduce very significant penalties for contraventions of the UCT regime under both the ACL and the ASIC Act:

How do these principles apply to new and existing contracts?

New contracts – applies to all contracts entered into on or after 9 November 2023 and any contracts renewed on or after this date.

Existing contracts – applies only to contracts which are varied and only applies to the varied terms not the whole contract.

When preparing a contract or varying an existing contract, businesses should consider upfront whether the criteria for the application of the unfair contracts regime are likely to be satisfied. If so, businesses will need to consider whether there are any terms that may require redrafting.

What type of terms might be unfair?
Section 25 of the ACL contains a long list of examples of the kinds of terms that may be unfair when found in the standard form consumer contract or a small business contract.

These include:

	Under the ACL	Under the ASIC Act
For companies	The greater of: AU $50 million; Three times the benefit obtained from the conduct; or 30% of the company’s adjusted turnover during the breach turnover period (minimum 12 months).	The greater of: 50,000 penalty units (currently AU $15,650,000.00); Three times the benefit obtained from the conduct; or 10% of annual turnover for the previous 12 months, capped at 2.5 million penalty units (currently AU $782.5 million).
For individuals	AU $2.5 million	The greater of: 5,000 penalty units (currently AU $1,565,000.00; or Three times the benefit obtained from the conduct.

 

• A term that permits, or has the effect of permitting, one party (but not the other party) to avoid or limit performance of the contract;
• A term that permits, or has the effect of permitting, one party (but not the other party) to terminate the contract (“termination for convenience”);
• A term that penalizes, or has the effect of penalizing, one party (but not the other party) for a breach or termination of the contract;
• A term that permits, or has the effect of permitting, one party (but not the other party) to vary the terms of the contract; 

While the above terms (and others) are included in Section 25 as examples, whether they are held to be unfair will ultimately depend upon the facts of the case.

Concerns of the ACCC

Based on recent ACCC investigations and proceedings, the following terms are likely to be of concern to the ACCC if they are included in standard form consumer and small business contracts:

• Terms permitting unilateral variation to the price or other terms of supply or acquisition of the goods or services;
• Terms which permit automatic renewal, particularly where insufficient notice is given;
• Terms that permit unilateral termination and determination of default by a party;
• Terms which impose unjust fees such as penalties for early termination, interest fees not clearly disclosed or disproportionate late payment fees;
• Terms which provide broad indemnities or exclusions of liability;
• Terms which exclude representations outside the agreement (e.g. entire agreement clauses); and Terms which incorporate extraneous documents by reference, particularly where those documents are not provided to the party and may be updated without notice.

Both the ACCC and ASIC have indicated that they are prepared to sanction companies for noncompliance. Both regulators are prepared to bring enforcement proceedings seeking substantial penalties now that the regime is in effect.

Examples of the types of contracts covered by the new regime

These legislative changes will have broad coverage.

Examples of contracts considered for compliance with the new unfair contract legislation include:

• Standard form offers terms and conditions (including customer terms and standard supply terms);
• Purchase order terms and conditions;
• Labour hire agreements;
• Professional services agreements and consultancy terms;
• Construction services agreements;
• Retail shop leases/ general lease agreements;
• Global website terms and conditions (including privacy policies); and
• Credit application terms.

Steps for businesses to take

Businesses need to consider whether this new regime will apply to any of their standard form consumer and small business contracts. If so, businesses should carefully review their contracts to identify whether any amendments are required.

Any management or other staff should be properly trained as to the risk areas for unfair contract terms.

There are numerous central considerations to consider including, as referred to above, transparency, your client’s business rationale and considerations of reasonableness and mutuality. (1, 2).

[1] Ashurst Article 17 October 2023

[2] KL Gates Article 10 November 2023

For more information contact Jon Broadley

Further reading:

• Australia enters into Economic Cooperation and Trade Agreement with India
• ATO's New Register of Foreign Ownership of Australian Assets

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