As a business owner, you must be aware of the recent changes regarding unfair contract terms (UCT) and how it affects your rights and responsibilities. The Federal Government warned of changes to the Australian market, and now those changes have come into effect. For instance, The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (the Bill) has now become law following Royal Assent on the 9th of November this year.

The Bill amends the Competition and Consumer Act 2010 (Cth) (CCA), the Australian Consumer Law (ACL) and the Australian Securities and Investment Act 2001 (ASIC Act). Furthermore, it significantly broadens the scope of the unfair contract terms regime by expanding the small business threshold and introducing serious penalties. Additionally, it increases penalties for all competition and consumer law contraventions. Indeed, this includes potential penalties of $50 million for a body corporate and $2.5 million for individuals.

This article outlines the proposed changes, their implications, and how they will affect your rights and responsibilities in your commercial contracts.

What Makes a Contract Term Unfair?

The definition of an unfair contract term remains unchanged. As a reminder, a contract term will be 'unfair' if it:

  • causes a significant imbalance in the rights and obligations of the parties;
  • is not reasonably necessary to protect the legitimate interests of the business; and
  • causes detriment to one party if the other party seeks to rely on it.

Further, this may include terms that enable one party (and not the other) to:

What is a Standard Form Contract?

The ACL does not specifically define 'standard form'. However, it does provide a framework of factors for courts to consider when determining whether a standard form contract exists. These factors include where:

  • one party possesses the bargaining power;
  • one party prepares the contract without a discussion between the parties;
  • the other party must accept or reject terms on a 'take it or leave it basis'; or
  • the other party does not have an adequate opportunity to negotiate the terms of the contract.

Additionally, some recognisable examples of standard form contracts include:

  • mobile phone plans;
  • airline sales terms and conditions;
  • gym memberships;
  • information technology licences; and
  • online contracts where the party is required to tick an acceptance box to accept terms and conditions.

What Are the Key Changes?

New Law Current Law
A person cannot propose, apply, rely or purport to apply or rely on an unfair contract term (UCT). A court may determine a contract contains a UCT and can thus declare the contract, or a part of the contract, void and unenforceable.
A court may impose a financial penalty where a contract contains a UCT or a person attempts to apply, rely on, or purport to apply or rely on a UCT.Where a contract has numerous UCTs, each unfair term in the contract may be considered a separate breach. No equivalent law.
The maximum penalties for a contravention of the CCA or ACL have increased to:for a body corporate, the greater of: + $50 million; + 3x the value of the benefit of the UCT (if it can be determined); or + 30% of adjusted turnover during the breach turnover period (i.e. over the period the breach occurred, with a minimum of 12 months). For an individual, $2.5 million. The maximum penalty for a contravention of the CCA was:for a body corporate, the greater of: + $10 million; + 3x the value of the benefit obtained; or+ where the value of the benefit cannot be determined, 10% of the annual turnover in the 12 months preceding the act or omission.For an individual, $500,000.
Courts may exercise more flexibility in their orders to prevent and reduce loss or damage concerning a UCT. The court can now make orders to prevent a party from using the same or substantially similar terms to those already deemed unfair in any future standard form or consumer contract. Once a court determines a term in a standard form contract to be unfair, either the whole contract or a specific part of the contract is automatically void.
In addition to the current injunction powers, the court can make an injunction preventing a person from: + entering into any future contract that contains a term that is the same or similar in effect to a declared unfair contract term; or+ applying, or relying on, a term in any existing contract that is the same or similar in effect to a term that has been declared unfair, whether or not that contract is before the court. Courts can make an injunction restraining a party from applying, relying on, or purporting to apply or rely on, a term of a contract that has been declared an unfair term.
The small business threshold under the ACL is expanded to include a business with:+ fewer than 100 employees; or + an annual turnover of less than $10,000,000. The small business threshold in the ACL was: + fewer than 20 employees;and either: + the upfront price payable under the contract is less than $300k; or + $1,000,000 if the contract is longer than 12 months.
In addition to the current law, the Bill clarifies that a contract may be a standard form contract despite there being an opportunity for: + a party to negotiate changes to contract terms that are minor or insubstantial in effect;+ a party to select a term from a range of options determined by another party; or+ a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract. In determining whether a contract is a standard form contract, the court must consider several matters, including: + whether one party had to reject or accept the terms of a contract in the form they were presented; and + whether the other party had an effective opportunity to negotiate the terms of the contract.

Does it Apply To Me?

Under the Bill, the UCT protections will apply to a small business contract if one party is a business that:

  • employs fewer than 100 people; or
  • has a turnover for the last income year of less than $10,000,000.

Under the ASIC Act, the protections will apply to a small business contract if:

  • the upfront price payable does not exceed $5,000,000; and
  • one party to the contract employs fewer than 100 people; or
  • has a turnover for the last income year of less than $10,000,000.

Even though consumers can negotiate contracts, the new changes recognise that consumers and small businesses often lack the resources and bargaining power to review and negotiate terms in standard-form contracts effectively. Therefore, the ability to negotiate minor or insubstantial changes will not negate the protections afforded to consumers with these legislative changes.

The new regime will apply to:

  • contracts parties enter into at or after the commencement date;
  • existing contracts renewed at or after the commencement date; and
  • terms varied at or after the commencement date.

When Do I Need to Make Changes to My Contracts?

Businesses impacted by these changes should begin reviewing and amending their consumer and standard form contracts immediately. While the unfair contract term changes will only come into effect 12 months after Royal Assent, the new maximum penalties are in force as of the day after the Bill received Royal Assent.

Key Takeaways

In summary, the Federal government has implemented new legislative changes to deter unfair and anti-competitive conduct in the Australian market, which ultimately benefits consumers and small businesses. Indeed, UCTs are now considered unlawful.

Furthermore, the threshold for what falls under the umbrella of 'small business', and can receive protection from UCTS, has expanded. Therefore, you should amend or remove UCTs from any current standard form or consumer contract. Moreover, the implication of penalties has heightened the consequences of having (and relying on) unfair contract terms. Additionally, businesses must be vigilant to ensure their contractual arrangements are fair and balanced.