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Changes to unfair contract terms laws in Australia: what businesses need to know to be compliant

Corporate
People signing a paper contract

Businesses have just under a year to prepare for changes to the unfair contract terms regime in Australia.

The Australian Federal Parliament recently passed significant amendments to the unfair contract terms regime to increase the scope of the regime and applicable penalties. The changes come into effect 9 November 2023 and will trigger essential changes for Australian businesses to implement over the next 12 months.

This article summarises the recent changes, identifies those affected and explores the implications for businesses operating in the Australian market.

Unfair contract terms reform

On 9 November 2022, the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (the Amending Act) received royal assent.

The Amending Act amends the unfair contract terms (UCT) provisions of the Competition and Consumer Act 2010 (Cth) (CCA) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Amendments to the UCT provisions of the CCA and ASIC Act include:

  • the introduction of a civil penalty regime prohibiting the use of, and reliance on, unfair contract terms by businesses;
  • expansion of protections to small businesses that are party to a small business contract;
  • clarification of factors the courts must consider when determining whether a contract is a standard form contract;
  • clarification of court powers to determine an appropriate remedy for breaches of the UCT regime;
  • clarification of the contractual provisions that are required, or expressly permitted, under Commonwealth, state or territory laws that are excluded from the UCT regime; and
  • new categories of contracts, which are excluded from the operation of the UCT regime.

Who is affected?

The reform applies to all businesses that use standard-form contracts in dealings with consumers and small businesses to:

  • supply goods or services,
  • sell or lease land, or
  • supply financial services or financial products.

In effect, the change will require businesses to review and, where necessary, alter all contracts that do not satisfy the incoming UCT requirements.

What is changing?

This table sets out the key changes to the UCT regime.

Current position 

New position 

Small-business protections

Australian Consumer Law 

The UCT regime applies to a small business contract if:

  • one party to the contract is a business that employs less than 20 people; AND
  • the contract has a duration of less than 12 months, in which the upfront price payable under the contract must not exceed $300,000, or the contract has a duration of more than 12 months, in which case it must not exceed $1 million.

 

Australian Consumer Law

The UCT regime will apply to a small-business contract if one party to the contract is a business that:

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

Note: the monetary contract threshold has been removed.

ASIC Act 

The UCT regime will apply to a small-business contract if:

  • one party to the contract is a business that:
  • employs less than 100 people; or
  • has a turnover for the last income year of less than $10 million.
  • the upfront price payable under the contract does not exceed $5 million.

Under the Australian Consumer Law and ASIC Act, part-time employees are to be counted as an appropriate fraction of a full-time equivalent employee.

Civil penalties

No equivalent.  

A civil penalty may be imposed by the courts if a person proposes, applies, relies upon or purports to apply or rely upon, a UCT.

The maximum penalty for breaches of the UCT regime will increase under the new laws.

For companies, the penalty will increase to the greater of:

  • $50 million (formerly $10 million);
  • three times the value of the benefit to the company if able to be determined; or
  • 30% of the corporation's turnover during the offence period (formerly 10% of the annual turnover only in the 12 months prior to the breach).

For individuals, the penalty is:

  • $2.5 million (formerly $500,000).

These penalties will only apply to new contracts and renewals, or variations of existing contracts entered into on or after 9 November 2023.

Court powers 

The court currently has the following powers.

  • Automatically void a term in a standard-form contract if the court determines it to be unfair.
  • On application by an affected party, or the ACCC on behalf of a party or a non-party, void a whole or part of a contract or collateral arrangement when a person or class of persons has suffered, or is likely to suffer, loss or damage.
  • Provide injunctive relief to restrain a party from applying, relying upon, or purporting to apply or rely upon, a term of a contract that has been declared unfair.

The court will soon have the following powers.

  • Void, vary or refuse to enforce a contract if such an order is appropriate to prevent loss or damage that is likely to be caused by the UCT.
  • On application by the ACCC, prevent a term that is the same or substantially similar in effect to a term that has been declared as unfair, from being included in any future standard-form small business or consumer contract.
  • On application by the ACCC, prevent or reduce loss or damage that is likely to be caused to any person by a term that is the same or substantially the same in effect to a term that has been declared unfair.
  • Provide injunctive relief to restrain a party from applying, relying upon, or purporting to apply or rely upon, a term of a contract that has been declared unfair.
  • Provide injunctive relief restraining a person from entering into any future contract or applying or relying upon a term of an existing contract that contains a term that is the same or similar in effect to a term that has been declared a UCT.

Determining whether a contract is a standard form contract 

There are several factors the court must consider in determining whether a contract is a standard form contract.

One consideration is whether a party was required to:

  • reject or accept the terms of a contract in the presented form, and
  • whether another party was given an effective opportunity to negotiate the terms of the contract.

In addition to the current factors, a court must also take into account whether one of the parties to a contract has used the same or a similar contract before.

A court may determine a contract to be a standard-form contract despite there being an opportunity for:

  • a party to negotiate alterations 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 the terms of the other contract or proposed contract.

Exemptions 

Contractual provisions that are required or expressly permitted by the law of the Commonwealth, or of a state or territory, are exempt from the UCT regime.

The following will also be exempt from the UCT regime:

  • contractual provisions that are legally mandated to be included in a contract under Commonwealth, state or territory law; and
  • contract clauses that result in other contract terms being included in a contract because of the operation of a Commonwealth, state or territory law, insofar as the provisions would prevent the other terms from being included or operating as required by the law.   

Affected parties 

The current law refers to "non-party consumers", despite applying to both consumers and small businesses.

The new law clarifies this position and will refer to a "non-party".

Excluded categories of contracts 

No equivalent.

The following categories of contracts will be excluded from the operation of the UCT regime.

  • The operating rules of licensed financial markets, such as ASX Limited.
  • The operating rules of licensed clearing and settlement facilities.
  • Real-time gross settlement systems approved as payment, and settlement systems by the RBA.
  • Certain life-insurance contracts, to ensure positive consumer outcomes.

Implications

A person will be in breach of the UCT laws if they include an unfair term in a standard-form consumer or small business contract entered into with a consumer or small business.

Separate breaches

It should be noted that each individual unfair term within a contract will be considered a separate breach. This could result in a court finding multiple breaches in a single contract.

Penalty calculations

The new maximum civil penalty for breaches of the UCT regime includes consideration of a penalty figure constituting 30% of a corporation's turnover during the offence period, as opposed to just 12 months prior. This could potentially result in significant financial penalties for companies if an unfair contract term was in effect for a long period of time.

Conclusion

The ACCC has been a long-time advocate for penalties applying to UCT breaches. Thus, businesses should expect increased scrutiny from the ACCC in respect of the use of UCTs.

Companies and individuals have just under a year to review and ensure all renewable, variable and proposed standard-form contracts and small-business contracts are compliant with the current and new UCT laws. For advice and support regarding competition and consumer law requirements and best practice within your organisation, contact our experienced team of competition and consumer law experts. We are offering a rapid review service to assess organisations' standard-form contracts for unfair-contract-terms compliance in preparation for the new laws taking effect on 9 November 2023. Please contact us to learn more about this service.

Photo by on Romaine Dancre Unsplash.

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

Authors

Keely O'Dowd

Senior Associate

Rebeccah Richards

Rebeccah Richards

Lawyer