Less than one month until Australian unfair contract terms changes commence and penalties apply

What you need to know:

• From 9 November 2023, 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. 
• In addition, more contracts will be caught by an expanded definition of what constitutes a "small business contract".  This may include contracts with subsidiaries and related bodies corporate of large entities, if they fall under the headcount or turnover thresholds.
• Regulators are primed and ready to enforce the new laws.  The Australian Competition and Consumer Commission has identified unfair contract terms as a priority and confirmed it will move to enforcement of the regime from 9 November 2023.  The Australian Securities and Investments Commission has similarly prioritised enforcement of the new regime and identified the insurance and credit sectors as an initial focus.

What you need to do:  

• Businesses should urgently consider whether the regime will apply to any of their standard form consumer and small business contracts before the prohibitions come into effect.  
• If so, businesses should carefully review their contracts to identify whether any amendments are required.
• We are assisting many businesses to make changes to their contracts, in order to comply with the new regime.

The countdown is on - less than one month until unfair contract terms are prohibited in Australia

In October 2022, Parliament passed significant amendments to Australia's laws on unfair contract terms in Schedule 2 to the Competition and Consumer Act 2010 (Cth) (the Australian Consumer Law) and the Australian Securities and Investments Commission Act 2001 (Cth).  The changes introduced new prohibitions and penalties in relation to making a standard form contract containing an unfair term, or applying or relying on an unfair term.  The changes also broadened the definition of "small business contract", with the effect that more contracts will fall within the regime.

These amendments will take effect on 9 November 2023, so it is important for businesses to understand the amendments and assess whether any of their contracts will now fall within the regime.

What types of contracts do the laws apply to?

The unfair contract terms regime applies to:

• standard form contracts; 
• 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.

Are there any exclusions?

There are certain exclusions from the regime.  These 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 a law of the Commonwealth, a State or Territory or included in the contract by operation of a law of the Commonwealth, a State or Territory that regulates the contract; 
• certain life insurance contracts; and
• some other limited exceptions.

You should rely on the exclusions with great care, given the significant penalties that could apply.

What is a "standard form" contract?

The term "standard form contract" is not defined in the Australian Consumer Law, but factors that will be taken into account by a Court in determining whether a contract is standard form include:

• whether one of the parties has all or most of the bargaining power in relation to the transaction;
• whether the contract was prepared by one party before any discussion between the parties about the transaction; 
• whether there was any real opportunity to negotiate the terms of the contract or it was effectively "take it or leave it"; and
• whether the terms of the contract take into account any specific features of the other party or the transaction.

Importantly, there is a rebuttable presumption 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.

What is a "consumer contract" or "small business contract"?

Under the ACL, a "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.

A "small business contract" (per the expanded definition) 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:

(i) at the time of entering into the contract, the party employs fewer than 100 persons; or 

(ii) the party's turnover in the last income year (within the meaning of the Income Tax Assessment Act 1997) that ended at or before the time the contract was made is less than $10 million.  

It is sufficient if only one of these criteria (ie headcount or turnover) are satisfied.  For the purposes of the headcount calculation, a part time employee or casual employee employed on a regular or systematic basis is counted as an appropriate fraction of the FTE equivalent.  

Importantly, the criteria of <100 employees or <$10 million turnover relates to the party to the contract.  As a result, some contracts with subsidiaries or related bodies corporate of large businesses will be captured under the definition of "small business contracts".

Under the ASIC Act, slightly different criteria apply.  In addition to the headcount 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 less than $300,000 or $1 million in the case of a multi-year contract.  The definition of "small business contract" in the Australian Consumer Law will no longer contain a transaction value limb.

When is a term "unfair"?

To be unfair under the Australian Consumer Law and the ASIC Act, a term must:

• cause a significant imbalance in the parties' rights and obligations under the contract;
• not be reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
• cause detriment (financial or otherwise) to the other party if it were to be applied or relied upon.

There is a rebuttable presumption that a term is not reasonably necessary.  

The Court will also consider the extent to which the term is transparent and the contract as a whole.

A term is transparent if it is:

• expressed in reasonably plain language;
• legible; and
• presented clearly; and
• readily available to any party affected by the term.

Importantly, a term that is clear and transparent can nonetheless be found to be unfair.

What is prohibited and what are the penalties?

From 9 November 2023, making (ie entering into) a standard form consumer contract or small business contract that contains an unfair term is illegal.  Similarly, applying or relying on an unfair term in a standard form consumer contract or small business contract is also illegal.  

Contravention of these new prohibitions will give rise to substantial maximum penalties under the Australian Consumer Law and the ASIC Act.  

Under the ACL individuals may be fined up to $2.5 million per contravention.  For corporations, the maximum penalty per contravention will be the greater of:

• $50 million; 
• three times the value of the benefit obtained (if that can be determined); or
• if that cannot be determined, 30% of the corporation's "adjusted turnover" during the "breach turnover period", which will be a period of at least 12 months.

Under the ASIC Act slightly different penalties apply.  The maximum penalty for a corporation that contravenes the prohibitions will be the greater of

• 50,000 penalty units (currently A$15.65 million); 
• 3 times the benefit derived and detriment avoided (if the court can determine the value of that amount); or 
• 10% of the annual turnover of the body corporate for the previous 12 months (up to a maximum of 2.5 million penalty units, currently A$782.5 million).  

For an individual, the maximum penalty under the ASIC Act will be the greater of 5,000 penalty units (currently A$1.565 million); or 3 times the benefit derived and detriment avoided (if the court can determine the value of that amount).  

Each unfair term will constitute a separate contravention of the relevant Act.  As such, where the regime applies, and a standard form contract containing several unfair terms is used multiple times, the potential maximum penalties are enormous.

How does the regime apply to new and existing contracts? 

The regime will apply to new contracts entered into on or after 9 November 2023, as well as contracts renewed on or after this date.  It will also apply to existing contracts which are varied (including through the addition of new terms) on or after 9 November 2023, in which case it applies only in relation to the term or terms that are varied or added (ie, 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 above are likely to be satisfied. 

If so, businesses will need to consider whether any terms may be unfair and require re-drafting.  Many businesses are taking this opportunity to upgrade their suites of template contracts, to ensure their contracts and procurement personnel can use them from 9 November 2023 without creating unfair terms risks in relation to new agreements they are putting in place.

What types 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 a standard form consumer contract or small business contract.  These include:

(a) a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;

(b) a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;

(c) a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;

(d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;

and many more.

While these terms (and others) are included in section 25 as examples, whether they are unfair will ultimately depend on the facts.

What types of terms has the ACCC already raised concerns about?

Although the prohibitions and the ability to seek penalties are new, parts of the unfair contract terms laws have been in force for some time now.  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 which permit 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 which 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 (eg 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 are primed and ready to enforce the new regime and will be on the look-out for companies not complying.  We expect both regulators will bring enforcement proceedings seeking significant penalties reasonably quickly after the regime takes effect.  

What are some examples of contracts covered by the regime

Some examples of the contracts Ashurst has reviewed for compliance with the new unfair contracts include:

• standard form offer 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;
• request for proposal rules;
• global website terms and conditions (including privacy policies); 
• credit application terms; and
• Master or standing offer agreements and supporting agreements.

If you would like us to assist your business with its unfair contract terms review, please reach out to a member of our team.

Is it too late to start now?

The prohibitions do not take effect until 9 November 2023 and it is not too late to audit your standard form agreements and start making the necessary changes.  Please reach out to a member of our team for any assistance you may need.

Authors: Alyssa Phillips, Partner; Angie Ng, Partner, Tihana Zuk, Partner; Melissa Fraser, Partner; and Amanda Tesvic, Expertise Counsel.