Beefed up unfair contract terms regime to commence next year

8 minute read 09.11.2023 Miranda Noble, Tova Gordon

The Australian Consumer Law's unfair contract terms (UCT) regime will dramatically change in November 2023, following the passing of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Amending Act).

Once the UCT reforms come into effect under the ACL, unfair terms will also become illegal and subject to heavy civil penalties of up to the greater of $50 million, three times the benefit or 30% of turnover (per contravention). The unfair terms regime under the ACL will also broaden to apply the UCT protections to a much broader range of businesses.

Timing – a 12 month transitional window to prepare

The UCT reforms will come into force on 10 November 2023, providing businesses with a 12 month transitional window in which to review and update their suites of standard form contracts to ensure compliance. This is a critical step for businesses, given the significant changes that the UCT reforms will make to the consequences of using or relying on unfair terms, and thereby the risk profile of using standard form contracts.

Prohibited and subject to penalties - the stakes will be raised significantly

Once the UCT reforms come into force, under the ACL, it will be illegal to propose an unfair term in a standard form consumer or small business contract that has been entered into. The explanatory memorandum explains that, with respect to proposing unfair terms, this applies where a person has entered into a contract, and is not intended to apply where a person merely drafts or creates a new standard form contract template for later use. It will also be illegal to apply or rely (or purport to apply or rely) on an unfair term in a standard form consumer or small business contract.

Pecuniary penalties can be imposed for each contravention of these prohibitions. Notably, each individual term contained in a contract proposed by the person is a separate contravention, and, as a result, a person can be found to have multiple contraventions in a single contract.

This will be a sizeable shift from the current position where a term found to be unfair term is only deemed void. The UCT reforms will bring the regime into line with other parts of the ACL which prohibit conduct and impose penalty provisions for breaches of the prohibitions.

Notably, the UCT reforms come at the same time when maximum penalties under the CCA and ACL will, through the Amending Act, significantly increase. Those penalty reforms will see (for example) a new maximum penalty for individuals of $2.5m and a new maximum penalty for corporations which is the greater of:

$50 million;
three times the benefit obtained and reasonably attributable to the conduct; or
potentially 30% of the corporation's adjusted turnover during the breach turnover period.

For more details on the significant increase in available maximum penalties under the CCA/ACL, see Risky business – Australia’s competition and consumer laws set to shift and Penalties for Competition and Consumer law breaches proposed to quintuple.

The UCT reforms, in conjunction with the penalty reforms, will dramatically shift the risk profile associated with use or reliance on potential unfair terms in standard form contracts. Businesses will need to actively review and assess their contracts with a heightened focus on compliance with the UCT regime going forward.

Other remedies / orders – Consequences extend beyond individual contract at issue

Beyond pecuniary penalties, the UCT reforms also include reforms under the ACL to empower courts to impose more extensive remedies and orders as considered appropriate by the courts. For example, courts can:

make orders for a whole contract or collateral arrangement, including to void, vary or refuse to enforce the contract, if this is appropriate to prevent loss or damage that is likely to be caused (and which do not require a court to consider that they will redress actual loss or damage);
make orders applying to any existing contracts entered into by a respondent that contains a substantially similar term to one the court has declared to be unfair, and / or which prevent a term from being included in future contracts; and
issue injunctions with respect to existing or future consumer or small business standard form contracts containing a term that is substantially the same as one the court has declared to be an unfair contract term.

The UCT reforms also clarify that the remedies available for ‘non-party consumers’ also apply to ‘non-party small businesses'.

Scope of contracts caught by UCT broadens – more small business standard form contracts protected by UCT regime

The UCT reforms will apply the scope of the UCT protections under the ACL to a much broader range of businesses, capturing contracts previously not caught by the regime.

Once the reforms come into effect, the UCT regime will apply to standard form small business contracts where at least one party either:

employs fewer than 100 persons – replacing the current threshold of 20 employees; or
has an annual turnover during the previous financial year of less than $10 million (with turnover calculated in accordance with specific provisions).

With respect to how employees are to be counted in determining if the 100 employee threshold is met, the reforms retain the existing exclusion for casual employees not employed on a regular and systematic basis. However, it also introduce a pro rata assessment for staff employed on a part time basis.

The UCT reforms will remove the current threshold of the upfront price payable under the contract for contracts for the sale of goods or services or the sale or grant of an interest in land which are regulated by the ACL. The threshold is currently less than $300,000 or $1 million for contracts with a duration of over 12 months.

Businesses will need to be mindful that a broader range of counterparties will now be 'small businesses' for the purposes of the regime, and standard form contracts used with those parties will be subject to the UCT regime.

Scope of contracts caught by UCT clarified – broad approach applies to what is a 'standard form' contract

For both consumer and small business contracts, the UCT reforms clarify what constitutes a ‘standard form contract’ under the ACL's UCT regime. For example, courts must take into account whether a party has entered into another contract prepared on substantially similar terms, and how many contracts that party has entered into. It also clarifies that a contract may still be 'standard form' even where there is an opportunity for a party to:

negotiate changes to terms of the contract that are minor or insubstantial in effect;
select a term from a range of options determined by another party; or
negotiate terms of another contract or proposed contract;

Exemptions

The UCT regime under the ACL currently exempts certain types of terms from being unfair. The UCT reforms expand this (for example) to exempt terms where those terms are included in a standard form contract by the operation of a Commonwealth, State or Territory law which regulates the contract.
Additionally, the reforms provide that a term of a contract that results in other contract terms being because of the operation of another law of the Commonwealth or a state or territory, is exempt from the UCT regime. This is insofar as the provisions would prevent the other terms from being included or operating as required by the law. It is because in some cases a law only requires or reads terms into a contact on a contingent basis (ie if other type of terms have already been included.

The explanatory memorandum provides an example in this regard:

Ajay’s Phone Company (Ajay Co.) is seeking to rent a retail property from Sharon’s Building Management Co (Sharon Co.) located inside building A. As part of the lease agreement, Sharon Co. has included a term allowing them to terminate the lease if they want to demolish or renovate the building the relevant retail property is located in.

Under the relevant State law, where a term is included in a contract for a termination of a retail lease on the grounds of the proposed demolition or renovation of the building in which the retail property is located, the lease is taken to include other terms setting out how a person must notify or compensate a tenant as a result of the termination.

The term allowing Sharon Co. to terminate the lease agreement is exempt from the unfair contract terms protections because it results in one or more other terms being included in the contract by operation of a law of a State. The terms about notice and compensation are exempt from the unfair contract terms provisions as they have been included in the contract, or are taken to be so included, because of a law of a State.

The UCT reforms also expand the types of contracts excluded from the UCT regime. For example, they have expanded to include contracts made under, or in accordance with, the operating rules of licensed financial markets, licensed clearing and settlement facilities, and time gross settlement systems approved as payment and settlement systems by the RBA, as well as certain life insurance contracts.

Financial products and services

The Amending Act also reforms the UCT regime in the Australian Securities and Commission Act 2001 (Cth) (ASIC Act). While many changes are common across the ACL and the ASIC Act, one difference is that the upfront price threshold is retained (and increased) for contracts regulated by the ASIC Act. Look out for our alert focused specifically on reforms to the ASIC Act and how that will impact financial service providers.

What do you need to do?

With a broadened scope and penalty provisions coming into play in November 2023, refreshing contracts to ensure compliance with the ACL's UCT regime should be a priority area for businesses. Proactive steps that should be taken in advance of the regime coming into effect include:

considering whether standard form contracts that previously fell outside of the ambit of the unfair terms regime are now captured under these new changes;
reviewing current standard form contracts to ensure they do not contain unfair contract terms, and amend (or remove) them where required to reduce risk; and
communicate the UCT reforms across the organisation at large, including compliance training on unfair contract terms to ensure the business as a whole understands its obligations under the regime and the real and increased risk of using, applying or relying on an unfair contract term.