Unfair Contract Terms to be Prohibited Under New Changes

On 10 November 2023, changes to the laws regarding the ‘unfair contract terms’ (UCT) regime will come into effect. From that date, the proposal of, use of, application of, or reliance on, UCT’s in standard form contracts is prohibited, and penalties for breaches of the prohibition will apply under new civil penalty provisions. The amendments will also mean that a much larger number of contracts will be captured by the UCT regime than have been in the past.

Businesses need to be aware of these changes, as the amendments to the UCT regime involve significantly increased penalties and enforcement actions for non-compliance. In advance of these changes, businesses need to evaluate any contractual arrangements or documents in place with customers and suppliers to assess what if any amendments are required to ensure compliance with the changes to the UCT regime.

In this Insights article, we explore the regime changes and how your business can prepare for the new reforms.

‘Unfair Contract Terms’ Current Regime

The UCT regime is contained in Part 2-3 of the Australian Consumer Law (the ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA). The UCT provisions of the ACL apply to standard form contracts with consumers or small businesses. A standard form contract will typically be one prepared by one party to the contract and not negotiated between the parties—it is offered on a ‘take it or leave it’ basis.

Under the current regime, a term of a consumer contract or small business contract is void if:

1. the term is unfair; and

2. the contract is a standard form contract.

A term of a standard form consumer or small business contract is unfair if (without limit):

• Imbalance – it causes a significant imbalance in the rights and obligations of the parties under the contract;

• Legitimate interests – it is not reasonably necessary to protect the legitimate interests of the party who gets an advantage from the term, and

• Harm – it would cause financial or other harm to the other party if enforced.

In determining whether a term of a contract is unfair, a Court must take into account the following:

1. Transparency - the extent to which the term is transparent;

2. Whole contract - the contract as a whole.

Changes to the ‘Unfair Contract Terms’ regime

The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (the Act) gained Royal Assent on 9 November 2022. This Act has introduced substantive amendments to both the CCA and the UCT regime. These amendments reflect an increasing focus by the ACCC to strengthen and clarify the existing UCT regime, and reduce the prevalence of unfair contract terms in consumer and small business standard form contracts.

The Act introduces the following key amendments:

1. Civil penalty regime – previously, if a Court determined a UCT to be ‘unfair’, the term would merely be void and unenforceable. However, the ACCC has determined that this has not provided sufficient deterrence from the use of UCT’s in standard form contracts. From 10 November 2023, a person is:

   1. prohibited from making a standard form consumer or small business contract that contains a UCT; and

   2. prohibited from applying or relying on (or purporting to apply or rely on) a UCT.

   3. If a person or body corporate contravenes the prohibition, a pecuniary penalty can be imposed for each separate contravention.

2. Increased penalties – the maximum penalties for breaches of the CCA have increased to:

   1. for a body corporate, the greater of:

      1. $50 million;

      2. if the Court can determine the value of the benefit obtained—three times the value of that benefit; or

      3. if the Court cannot determine the value of the benefit obtained—30% of the body corporate’s adjusted turnover during the breach turnover period for the offence, act or omission.

   2. for an individual: $2,500,000.

3. Financial thresholds removed – the Act removes the ‘contract value’ thresholds that have previously applied to small business contracts to which the ACL applies.

4. Definition of ‘small business contract’ expanded – the definition of a ‘small business contract’ is expanded and captures a wider class of contracts. From 10 November 2023, a ‘small business contract’ is defined as one if:

   1. the small business employs fewer than 100 persons; or

   2. the small business has an annual turnover in the previous income year of less than $10,000,000.

5. Determination of a ‘standard form contract’ is modified – a consumer contract or small business contract may be characterised as a ‘standard form contract’ despite the existence of one or more of the following:

   1. an opportunity for a party to negotiate changes, to terms of the contract, that are minor or insubstantial in effect;

   2. an opportunity for a party to select a term from a range of options determined by another party;

   3. an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

   4. In determining whether a consumer contract or small business contract is a ‘standard for contract’, a Court must also take into account whether one of the parties has used the same or similar contract before.

6. Expansion of Court powers – if a Court makes a determination that a term in a standard form contract is a UCT, the Court may make the following orders:

   1. Injunctions:

      1. restraining the party from making any future contract that contains a similar term;

      2. restraining the party from applying or relying on a similar term of any existing contract.

   2. Orders:

      1. declaring the whole or part of the contract to be void or to have been void ab initio (i.e., from the beginning);

      2. varying an existing contract;

      3. refusing to enforce any or all of the provisions of an existing contract;

      4. to redress whole or in part, loss or damage that has been caused to any person by term;

      5. to prevent or reduce loss or damage that is likely to be caused.

Steps before the deadline

When the changes to the UCT regime take effect on 10 November 2023, businesses using standard form contracts will face significantly higher stakes. The Act has widened the scope of the UCT regime and has introduced substantial penalties for non-compliance. In advance of the deadline, it is imperative for businesses to take action by reviewing all their standard form contracts and ensuring compliance. Businesses using standard form contracts should also make enquiries to determine whether their customers will fall under the new small business thresholds. If you are concerned about the potential impacts that these reforms may have upon your business, contact BlackBay Lawyers today to discuss how you can remain compliant with the UCT regime.

The content in this Article is intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice. It should not be relied upon as such. You should seek legal or other professional advice before acting or relying on any of the content.