Amendments to the Australian Consumer Law (ACL) to strengthen the provisions relating to unfair contract terms (UCT) came into effect on 9 November 2023. Gone are the days of “take it or leave it” contracts.
The changes expand the scope of the UCT regime, including by removing the monetary threshold under the ACL, expanding the class of “small businesses” that can rely on UCT protections, and introducing increased pecuniary penalty provisions.
Companies had a 12-month “grace period” to get their house in order and meet the new standards or risk facing significant consequences for non-compliance.
Although the changes do not apply retrospectively to existing contracts, they apply to all new contracts made on or after 9 November 2023, and any contracts renewed after that date. The UCT regime also applies to any terms that are varied after 9 November 2023.
For many, the rollout of the expanded UCT regime signals the commencement of a new era in Australian contract law. The Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) have both indicated that they will prioritise enforcement of the new regime.
Significantly, businesses that might previously have operated outside the ambit of the UCT regime should be aware that the regime may now apply to them. If your business uses standard form contracts, you need to understand the implications of the changes, and the steps you should take to ensure compliance with the legislation.
The UCT regime
The legislative framework for the UCT regime is contained in the ACL with mirror provisions in the ASIC Act 2001 (ASIC Act). For the sake of simplicity, this article refers to the ACL section numbers only, other than where there is a meaningful difference between the ACL and the ASIC Act.
The UCT regime applies to terms found to be “unfair” in consumer and small business standard form contracts. Under the new UCT regime, proposing, applying, or relying on a UCT is a contravention and each UCT contained in a contract is to be considered a separate contravention.
What is “unfair”?
A term of a consumer contract or small business contract is void if the term is unfair and the contract is a standard form contract (s.23(1) of the ACL).
The definition of “unfair” remains the same under the new regime and is as follows (s.24(1) of the ACL):
“A term of a consumer contract or small business contract is unfair if:
(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the
term; and
(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.”
In determining whether a term is unfair, a court may take into account such matters as it thinks relevant but must take into account the extent to which the term is transparent, as well as the contract as a whole (s.24(2) of the ACL).
Examples of contractual terms which may be deemed “unfair” are found in s.25 of the ACL. They include, for example:
(a) a term that permits one party (but not another party) to avoid or limit performance of the contract;
(b) a term that permits one party (but not another party) to terminate the contract or to renew or not renew the contract;
(c) a term that permits one party (but not another party) to vary the terms of the contract; and
(d) a term that penalises one party (but not another party) for breach or termination of the contract.
What is a “standard form contract”?
If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party proves otherwise (s.27(1) of the ACL).
In determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant but it must take into account the matters listed in s.27(2) of the ACL. Those matters include:
(a) whether one of the parties has all or most of the bargaining power relating to the transaction;
(b) whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented; and
(c) whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1).
However, a contract may be determined to be a standard form contract despite the existence of an opportunity for a party:
(a) to negotiate changes to terms of the contract that are minor or insubstantial in effect;
(b) to select a term from a range of options determined by another party; or
(c) to negotiate terms of another contract or proposed contract,
(s.27(3) of the ACL).
In substance, in order for a contract not to be a standard form contract, all parties must have had a meaningful opportunity to negotiate the terms.
What are the key changes to the regime?
The suite of the changes to the regime were introduced by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022.
Changes to the contract value thresholds
One significant change is the removal of the contract value threshold for contracts under the ACL and the raising of the value threshold for contracts regulated by the ASIC Act (meaning the regime captures an expanded class of small business standard form contracts).
This means that under the ACL, the new UCT regime applies to all consumer and small business standard form contracts, regardless of their value (s. 23(4) of the ACL).
Meanwhile, under the ASIC Act, the regime applies to a small business standard form contract if the upfront price payable (excluding interest) for the contract is $5 million or less (s.12BF(4)(a) of the ASIC Act), rather than the previous threshold which was $300,000 or, if the contract had a duration of more than 12 months, $1,000,000.
The expanded definition of small business contract
The new regime has also expanded the definition of a “small business contract”.
To qualify as a “small business contract” under the new regime, at least one party to the contract must satisfy either or both of the following conditions:
(a) the number of employees must be fewer than 100 (an increase from the previous requirement of 20 employees); and/or
(b) the annual turnover in the previous financial year must be less than AUD 10 million,
(s.23(4)(b) of the ACL).
Expanded meaning of contravention
As mentioned above, it is now a contravention to:
(a) enter into a standard form contract that contains a UCT; or
(b) rely on an unfair term in a standard form contract.
(ss.23(2A) and (2C) of the ACL).
Pecuniary penalties
Previously, UCT’s did not attract pecuniary penalties. Rather, the relevant term would simply be deemed void and unenforceable.
A significant change to the UCT regime is the introduction of civil penalty provisions for using or relying on unfair terms (s.224 of the ACL).
Under the ACL, where the contravention is committed by a corporation, in addition to declaring the unfair term void, the court can now impose a maximum financial penalty that is the greater of:
(a) $50 million;
(b) three times the value of the benefit (if the court can determine the value of the benefit); or
(a) if the court cannot determine the value of the benefit, 30% of the adjusted turnover during the “breach turnover period’ for the act or omission,
(s.224(3A) of the ACL).
Further, where the contravention is committed by an individual, the maximum penalty is $2.5 million (s.224(3) of the ACL).
The ASIC Act contains some differences in relation to the maximum penalties, as set out in s.12GBCA.
New remedies expanding the scope for the court‘s intervention
The amendments also grant the courts additional powers to make orders to prevent or reduce loss or damage that may result from an unfair term. A party no longer needs to establish it has suffered a loss or is likely to suffer loss or damage, to obtain an order.
Rather, once a term is declared unfair, the court can order remedies. In particular, the court can declare void, vary, or refuse to enforce part or all of the contract, so as to prevent or reduce damage (s.243B(2)(c)-(e) of the ACL).
Under the new regime, the court can also make orders regarding any existing contracts that contain similar terms to that declared void, regardless of whether the other contract is before the court. The court can do this on application from the ACCC to prevent such terms from being included in future contracts or to prevent (or reduce) any losses that the terms have caused or may cause (s.243B(1) of the ACL).
The court can also award an injunction against a respondent in relation to existing or future contracts containing terms that are the same, or substantially the same, as that which is declared a UCT (s.243B(2)(a)-(b) of the ACL).
Are any terms or contracts excluded from the new regime?
The regime does not apply to a term of a contract to the extent, but only to the extent, that (see s.26(1) of the ACL):
(a) the term defines the main subject matter of the contract; or
(b) the term sets the upfront price payable under the contract; or
(c) the term is required, or expressly permitted, by a law of the Commonwealth or of a State or Territory; or
(d) the term is included in the contract, or is taken to be so included, by operation of a law of the Commonwealth, or of a State or Territory, that regulates the contract; or
(e) inclusion of the term has either or both of the following results:
(i) one or more other terms are included in the contract, or are taken to be so included, by operation of a law of the Commonwealth, or of a State or Territory, that regulates the contract;
(ii) such a law requires one or more other terms to be included in the contract.
insurance contracts, where the term is a transparent term and:
(a) is disclosed at or before the time when the contract is made; and
(b) sets an amount of excess or deductible under the contract,
(see s.12BI(1)(f) of the ASIC Act).
Ensuring Compliance
Companies should take proactive steps to ensure compliance with the new regime.
Those steps include the following.
First, determine whether any current, renewed, or future contracts fall within the ambit of the new regime. In doing so, consider the changes to the contract value thresholds and take into account the definition of a ”standard form contract” – do parties have an opportunity effectively to negotiate terms that are not just minor terms?
Second, determine whether the contract falls within the broadened definition of a “small business contract”. This means determining whether the contract will be used with businesses that have fewer than 100 employees or an annual turnover of less than $10 million.
Third, review any current or future standard form contracts to ensure they do not contain any UCT’s. While the UCT regime lays out certain examples, they are not exhaustive, and terms will be assessed on a case-by-case basis.
Summary
The changes to the UCT regime will impact your business if you use standard form contracts, and your counterparties are consumers or small businesses.
With substantial penalties for non-compliance and an expanded scope of remedies, businesses should take proactive steps to ensure they adapt to, and comply with, the new regime.
If in doubt as to whether the UCT regime applies, or whether a term in a standard form contract is “unfair”, businesses should take a conservative approach.
