Reforms to the laws around unfair contract terms
The passing of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) reformed Australia’s laws on unfair contract terms (UCTs) to be more stringent on businesses entering into standard form consumer contracts or small business contracts. The motivation behind the changes was primarily to address a perceived imbalance of power between parties when negotiating and entering into such contracts.
Businesses entering or proposing to enter into standard form consumer contracts or small business contracts which contain an unfair contract term are susceptible to breaking the law, with the Courts empowered under the updated regime to impose substantial penalties on businesses and individuals who propose, use or rely on UCTs in their standard form contracts.
Individuals and businesses who have not yet undertaken a review of their standard contracts should do so as to ensure compliance with the updated UCT regime.
Background – Previous position
The original UCT laws came into effect in 2010 under the Australian Consumer Law contained within the Competition and Consumer Act 2010 (Cth) (ACL). Mirrored provisions are also contained within the Australian Securities and Investments Commission Act 2001 (Cth).
The UCT regime previously applied to standard form contracts:
- with consumers or “small businesses” that employed fewer than 20 employees; and
- involving an upfront payment of less than $300,000 (or $1 million for contracts with a duration of over 12 months).
Prior to the implementation of the UCT reforms, the Court’s powers when dealing with a UCT were limited to voiding specific contract terms.
What has changed?
The reformed laws have:
- broadened the scope of UCT protections under the ACL to apply to a larger number of businesses;
- provided additional clarification about what constitutes a “standard form” consumer or business contract;
- made it illegal to propose, use or rely on an unfair term in a standard form consumer or business contract; and
- empowered Courts to be able to impose financial penalties on individuals and corporations for breaching the UCT laws, as well as to make additional remedial orders for the UCTs in question.
The new UCT regime applies to all contracts entered into on or after 9 November 2023, as well as to any existing contracts which were renewed or varied on or after that date.
Key considerations under the new UCT regime
Before entering into any contract with a third party, individuals and businesses should consider whether there is a risk of potentially being in breach of the UCT laws and to ensure appropriate action is taken to avoid that risk.
The key issues which should be considered are below.
| Elements of the UCT regime | Comment |
|---|---|
| Is the contract a consumer contract or a small business contract? | The ACL defines a “consumer contract” as being 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 those goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption. The ACL defines a “small business contract” as being a contract for the supply of goods or services or a sale or grant of an interest in land where at least one party to the contract satisfies one or both of the following conditions: (a) at the time of entering into the contract, the party carries on a business and employs fewer than 100 persons (excluding casual employees other than those employed on a regular and systematic basis, and including part-time employees as an appropriate fraction of a full-time equivalent); and (b) the party’s annual turnover for the previous income year that ended at or before the time when the contract was made is less than $10 million. As the definition applies to the party to the contract, large entities choosing to contract through or with smaller subsidiaries or related bodies corporate may inadvertently be subject to the UCT regime. Contracts made with overseas consumers or businesses involving business in Australia will also still be caught under the definitions of consumer contract and small business contract. |
| Is the contract a “standard form” contract? | Whilst the ACL does not define what a standard form contract is, generally speaking a contract will be deemed to be standard form if it is prepared by one party based on that party’s standard terms, with the counterparty having little to no opportunity to negotiate those terms. A Court will have regard to the following factors when considering whether a contract is a standard form contract: (a) whether one of the parties is in a dominant bargaining position in the dealings; (b) whether one party prepared the contract prior to the parties discussing the transaction; (c) whether the counterparty is given a legitimate opportunity to negotiate the terms of the contract (vs a position where it is effectively “take it or leave it”); (d) whether the contract terms take into account the specific characteristics of the counterparty or the transaction in question; and (e) the number of times the party preparing the contract has entered into the contract on the same (or substantially similar) terms. The Court will presume that an agreement is a standard form contract – this is a rebuttable presumption and the onus is on a party to prove that a contract is not a standard form contract. The new UCT regime has made it clear that a contract may still be a standard form contract even where there is an opportunity for a party to: (a) negotiate changes to the contract which are minor or insubstantial in effect; or (b) have the opportunity to select a term from a range of options determined by the other party. The Court will also disregard circumstances where a party is given the opportunity to negotiate the terms to another contract or proposed contract with the original party. |
| Does the contract contain an unfair term which the contravening party relies on? | Under the ACL, a term of a consumer contract or small business contract is “unfair” if it: (a) causes a significant imbalance in the parties’ rights and obligations; (b) is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by such a term; and (c) would cause detriment (whether financial or otherwise) to a party if the term were to be applied or relied on. A rebuttable presumption exists that a term of a contract is not reasonably necessary – the onus is therefore on a party to prove why the term was reasonably necessary in the circumstances. When deciding whether a term is unfair, the Court will consider the extent to which the term is ‘transparent’. A term will be taken to be transparent if it is expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term. |
Penalties and Remedies
Arguably the most significant change to the UCT laws brought about by the updated regime are the introduction of pecuniary penalties.
For each contravention under the new UCT regime, the Court may impose on:
- individuals a maximum penalty of $2.5 million; and
- corporations a maximum penalty equal to the greater of:
- $50 million;
- three times the benefit obtained and reasonably attributed of the conduct; or
- if the above cannot be determined, 30% of the corporation’s “adjusted turnover” during the “breach turnover period” (being a period of at least 12 months).
Accessorial liability for individuals within a corporation under the UCT regime has yet to be tested. Individuals within a corporation (such as in-house lawyers and other officers) should be mindful of the risk of being exposed to individual penalties under the regime in the event a Court finds the individual was involved in the application of or reliance on a UCT by the corporation.
Additionally, the new UCT laws empower a Court (amongst other things) to:
- declare all or part of the relevant contract void;
- vary or refuse to enforce a contract; and/or
- issue an injunction for existing or future contracts which contain a substantially similar term to the one the Court has declared to be an unfair contract term.
Examples of when terms are unfair
Whilst the Courts will ultimately determine whether a particular contract term is unfair having regard to the specific circumstances involved, there is guidance about the types of issues that indiviudals and businesses should focus on when ensuring compliance with the UCT regime.
Section 25 of the ACL provides substantive examples of types of unfair contract terms. Additionally, the ACCC (as the principal regulator which enforces the ACL) has, through its conduct to date, highlighted terms it will examine in standard form consumer and small business contracts as being potentially unfair. These include the following:
- One-sided terms: terms that limit or exclude the liability of one party to the other party (but not vice versa) or that permit only one party to the contract to exercise certain rights.
- Unfair indemnity terms: terms which provide broad indemnities in favour of one party to the other party (with no reciprocity), which will potentially arise where:
- the party giving the indemnity is required to indemnify the other party against losses not within their reasonable control;
- the indemnity provision contains limited or no exceptions; and/or
- the indemnity is not worded clearly, leaving confusion as to when it can be enforced.
- Automatic renewal terms: terms involving automatic renewal (for example, where a period of service automatically renews and a customer is required to make further payment for that period) – these terms are more likely to be unfair where no notice is required to be provided about the renewal, or where the customer will incur substantive charges if they terminate early into the renewal period. Additionally, the ACCC will be concerned where the terms of the automatic renewal are vague or not appropriately disclosed.
- Unilateral variations: terms that allow one party to unilaterally vary the terms of the contract, but not the other – in particular, terms that allow a party to vary the price payable by the other party under the contract without the contract providing the other party with a right to terminate.
- Price setting: terms that require a party to sign and be legally bound to the contract before knowing the price they will be required to pay.
- Restricting commentary: terms that prevent a party from providing reviews or commentary about another party or its business.
Preventative Action
Businesses should consider taking the following steps in order to ensure compliance with the updated UCT regime:
- Undertake a review of the contracts in use or which are proposed to be used by the business to determine if they are “standard form” contracts that may be caught by the updated UCT regime.
- Undertake a review of contracts that may be caught by the updated UCT regime and identify any terms that may potentially be deemed to be unfair.
- Consider what amendments are required to be made to the contract so as to mitigate the risk that a term will be deemed to be unfair.
- Ensure staff involved in the negotiation or administration of contracts are given adequate training about the updated UCT regime and the consequences of relying on or using unfair terms in contracts.
If you are uncertain about whether your contracts are subject to the UCT regime or would like assistance with review or amendment of your contracts, please contact Paul Cavanagh on (08) 9221 0033 or pcavanagh@mphlawyers.com.au.