Changes to unfair contract laws in Australia.

The Australian Government has recently passed amendments to Australia’s unfair contract terms (UCT) regime which will see the scope of the existing regime broaden in the Competition and Consumer Act 2010(Cth) (CCA) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The amendments will also dramatically increase the penalties imposed on those businesses (and individuals) that contravene competition and consumer laws.

The amendments will be effective as of 9 November 2023 and will trigger essential changes for Australian businesses.

What is the current regime?

Australia’s UCT regime is a set of laws that aim to protect consumers and small businesses from unfair contract terms in standard form consumer or small business contracts.

A ‘consumer contract’ is a contract with an individual who acquires what is supplied wholly or predominantly for personal, domestic, or household use. A ‘small business’ contract is a contract with a business that employees less than 20 people and upfront price payable is below $300,000 (for a contract less than 12 months’ duration) or $1 million (for a contract 12 months duration or more).  

Unfair terms are clauses in these standard form contracts that are deemed to be unfair to one party, usually the weaker party, such as a consumer or small business. Under UCT laws, a term in a standard form contract is ‘unfair’ if it:

- would cause a significant imbalance in the parties’ rights and obligations arising under the contract;

- is not reasonably necessary to protect the legitimate interests of the larger party; and

- would cause detriment to the counter party if relied on. Detriment can be non-financial (e.g., using a counter party's personal data,or a limitation on a party's legal rights to sue).

To determine whether the term is unfair, a court will usually consider the transparency of the term. Contractual terms that are in plain language, easy to read, readily accessible by small business and individual customers and presented clearly, are less likely to be considered as unfair by a court.

What are the changes?

The key changes that are brought about by the amendments to UCT provisions in the CCA and the ASIC Act include:

1.      expanded scope and application of the UCT regime:

a.      the definition of a ‘small business’ is expanded so that small businesses will no longer involve a $300,000 contract threshold under the ACL – any contract with a ‘small business’ will be covered.

b.      a small business will be defined as a business with less than 100 employees (previously it was less than 20) or an annual turnover of less than $10 million;

2.      the introduction of financial penalties for contravention of the UCT laws;

3.      clarification of factors the courts must consider when determining whether a contract is a standard form contract; and

4.      providing more powers to the ACCC to enforce the UCT provisions and penalties for breaches.

The Act has increased the maximum civil and criminal penalties for companies who contravene the CCA or the ACL to include the following:

1.      Companies – maximum penalties to increase to the greater of:

a.      $50 million (a five-fold increase on the current amount of $10 million);

b.      if the court can determine the value of the benefit obtained from the contravention – 3x the total value of that benefit (no change from current); and

c.       if the court cannot determine the value of the benefit obtained – 30% of Australian connected group turnover during the ‘breach turnover period’ (a potentially unlimited increase on the current maximum of 10% of group turnover for a 12 month period).

2.      Individuals – maximum penalties to increase to $2.5 million per contravention (up from $500,000). The Act also imposes criminal penalties for individuals.

Why the changes?

The changes aim to create a level playing field amongst small business and larger businesses by reducing the power imbalance that often exists in contract negotiations.

The rationale for the changes was due to the Australian Competition and Consumer Commission (ACCC) identifying that although the existing regime does void unfair contract terms, it does not penalise their use. The ACCC considered that many large businesses were not deterred from using unfair contract terms.

The ACCC has been trying to advocate for small businesses and consumers who are entering into standard form contracts and are experiencing an imbalance in power.

What do the changes mean for businesses?

The changes apply to all businesses that use standard form contracts when dealing with consumers or small businesses to:

1.      Supply goods or services;

2.     Sell or lease land; or

3.     Supply financial services or financial products.

The changes for UCT will only apply to:

·       new contracts entered into at or after the commencement date of the new regime;

·       existing contracts that are renewed at or after the commencement date of the new regime; and

·       terms of an existing contract that are varied at or after the commencement date of the new regime.

Although there is some discretion when interpreting what an ‘unfair’ term is, it is critical for any Australian business that uses standard form contracts to consider the potential ramifications for getting it wrong. We strongly recommend that all businesses take a proactive approach in making it a priority to review their contracts to identify any that may fall within the definition of a standard form, small business or consumer contract and make any consequential changes.

 If you require assistance with reviewing any contracts or needing any further advice on the significance of these amendments, please contact us.

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