Less than one month until Australian unfair contract terms changes commence and penalties apply
17 October 2023
17 October 2023
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.
The unfair contract terms regime applies to:
There are certain exclusions from the regime. These include:
You should rely on the exclusions with great care, given the significant penalties that could apply.
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:
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.
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.
To be unfair under the Australian Consumer Law and the ASIC Act, a term must:
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:
Importantly, a term that is clear and transparent can nonetheless be found to be unfair.
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:
Under the ASIC Act slightly different penalties apply. The maximum penalty for a corporation that contravenes the prohibitions will be the greater of
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.
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.
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.
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:
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.
Some examples of the contracts Ashurst has reviewed for compliance with the new unfair contracts include:
If you would like us to assist your business with its unfair contract terms review, please reach out to a member of our team.
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.