Unfair contract terms: it’s time to get your house in order

08/05/2023

From 10 November 2023 Australia’s unfair contract terms (UCT) regime will apply to a much, much larger pool of contracts than it has in the past. Businesses that might previously have been comfortable that the UCT regime did not affect them, now need to take notice. At the same time, the regime now attracts significantly increased penalties for non-compliance than it has in the past.

With just on six months until these changes commence, Australian businesses should be taking stock of the standard documents they use to contract with customers and suppliers to assess what they need to do to comply with the updated UCT regime.

Background

The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (the Act) received Royal Assent on 9 November 2022 and introduced a host of changes to the Competition and Consumer Act 2010 (Cth) (CCA) and the UCT regime.

Most of the Act’s changes to the UCT regime were subject to a transition period that ends on 10 November 2023. The expanded UCT regime will apply to standard form consumer contracts and small business contracts: (i) entered into from 10 November 2023; or (ii) renewed or varied from 10 November 2023.

Changes to the ‘Unfair Contract Terms’ regime

The new changes introduced by the Act reflect the Australian Competition and Consumer Commission’s (ACCC) increased focus on protecting consumers and small businesses. We have discussed these changes in previous articles (see here and here). The main changes include:

Increased penalties: The Act increased the maximum penalty for breaches of the CCA to:

for a body corporate – the greater of: (i) $50 million; (ii) x3 the value of the benefit obtained and that is reasonably attributable to the breach, if that can be determined; and (iii) if the value of the benefit cannot be determined, 30% of adjusted turnover during the breach turnover period (i.e., over the period the breach occurred, with a minimum of 12 months); and
for an individual - $2,500,000.

This change came into effect on 10 November 2022.

UCTs are illegal and attract pecuniary penalties: Previously, UCTs did not attract penalties and were merely deemed void and unenforceable if a Court found a term was ‘unfair’. From 10 November 2023, a person is prohibited from making a contract with a UCT (if the UCT was proposed by that person) and prohibited from applying or relying on (or purporting to apply or rely on) a UCT. Each UCT contained in a contract is a separate contravention.[1] For the first time since the UCT regime was introduced, a pecuniary penalty can be imposed if a person contravenes this prohibition (and that pecuniary penalty could be large).
Broader definition of small business: The UCT regime applies to standard form contracts with consumers and small businesses. From 10 November 2023, the definition of a small business will be expanded from a business that employs fewer than 20 people, to one that has fewer than 100 employees or less than $10 million in annual turnover in the previous income year. This amendment significantly increases the scope of businesses that will be protected by the UCT regime. In particular, Australian businesses that engage suppliers using standard form contracts need to be aware that any suppliers with fewer than 100 employees will now be protected as ‘small businesses’ under the UCT regime.
Changes to assessment of ‘standard form contracts’: The Act clarifies that a Court should not consider certain factors when assessing whether a contract is a ‘standard form contract’. From 10 November 2023, a Court must not consider whether a party had the opportunity to negotiate minor changes, whether it had the opportunity to select a term from a range of options or whether a party to another contract was given the opportunity to negotiate its terms. Businesses that previously categorised contracts as not ‘standard form’ (and therefore not subject to the UCT regime) based on these factors, will need to revisit this classification.
More powers given to the Court: The Act gives greater power to the Court including, for example, the power to injunct a person from making future contracts that rely on the UCT or from applying or relying on an UCT in any existing contract. In addition, the Court is empowered to make orders it considers appropriate to redress loss or damage that has been caused or to prevent or reduce loss or damage that is likely to be caused by the UCT.

What is an unfair term?

The Act does not make any changes to the test for ‘unfairness’. As a recap, a term of a standard form consumer or small business contract is unfair if:

it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
it would cause detriment (financial or otherwise) to a party if it were to be applied or relied on

The outcome of applying the unfairness test will differ depending on the specific commercial circumstances. The CCA does not include a ‘blacklist’ of terms that are automatically considered “unfair” but includes a long list of clauses which may be unfair. Whether a term is considered ‘unfair’ will be determined on a case-by-case basis, depending on the specific circumstances of the parties.

Looking at the ACCC’s enforcement history can be helpful to get a sense of the kind of terms that have been challenged for ‘unfairness’ in the past.

In the table below, we have analysed the ACCC’s enforcement actions over the past two years to round up six key categories of terms that have most commonly been challenged for unfairness, as well as some options for mitigating the risk of each term being considered unfair.

Description of term	Contract terms that could be UCTs	Possible mitigations
1. Automatic renewal terms	Automatic rollover of the contract without notice Unilateral rights for one party to extend a contract an unlimited number of times Free product trials that roll into paid subscriptions without notice	Obligation to notify of upcoming renewal Making renewal periods shorter a no-charge termination for convenience right for the customer
2. Imbalanced termination rights	Unilateral rights to immediately suspend performance of a contract for any reason without notice Unilateral termination for convenience rights Excessive early termination charges or other “exit fees”, e.g., excessive fees for disengagement services or data migration off a platform	Limiting suspension rights to specific, material breaches of the contract (e.g. security breaches) Making rights to terminate mutual Including a notice requirement and giving an opportunity to remedy before termination/suspension Reducing exit fees to a reasonable amount
3. One-sided limitation of liability or indemnity terms	Very low liability caps (e.g. limiting liability to fees paid where minimal fees upfront) or one-way liability caps Broad/unreasonable list of excluded heads of loss (e.g. excluding liability for one party’s wilful default or negligence) Broad/unreasonable list of uncapped heads of loss One-way indemnity for risks outside the indemnifying party’s control One-way indemnity for breach of contract	Making limitations of liability mutual or adding floor values Removing one-sided indemnities or making them mutual Limiting recovery under indemnities to loss caused by the indemnifying party’s acts/omissions or breach
4. Unilateral variation terms	Right to unilaterally vary product description Right to unilaterally vary service levels Right to update terms published on a website without notice Right to unilaterally update company policies (e.g. an acceptable use policy), which forms part of the contract	Including a requirement to get customer consent to vary a contract Introducing a notice period and opportunity to terminate before variations are effective
5. Unfair payment terms	Right to unilaterally vary fees Requirement for pre-payment, no ability to get refund for unused services/products Charges payable without performance by the supplier	Introducing right to terminate if fees are increased Adding process for customer to challenge invoices Introducing right to receive full/partial refund of pre-paid fees on termination

Next steps

When the UCT changes come into effect on 10 November 2023, the stakes will be much higher for businesses using standard form contracts. The Act has had the dual impact of giving the UCT regime a broader application and introducing substantial penalties and enforcement action for failure to comply with the UCT regime. Businesses should act now to take stock of all their standard form contracts and ensure they are compliant before the 10 November deadline. For each precedent contract used in a business, we recommend asking:

Is this a ‘standard form contract’, taking into account the new assessment factors proposed by the Act?
Will this contract be used with consumers or with customers or suppliers that have fewer than 100 employees or that have an annual turnover of less than $10 million?
Does it contain any UCTs? The table above provides a starting point, but be aware this is a fact-based assessment that must be performed on a case-by-case basis.

Authors: Lesley Sutton, Claire Harris, Ed Zheng