Changes to Unfair Contract Terms

Businesses should be aware of the changes to laws governing unfair contract terms which will come into effect on 9 November 2023.  These amendments broaden the scope of the unfair contract terms regime to apply to more small businesses and largely increase the penalties and consequences for including an unfair term in a contract.

Changes to the Australian Consumer Law and ASIC Act

On 9 November 2022 the Federal Government passed a reform of the laws governing unfair contract terms through the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth) (Bill). The Bill operates to:

1. expand the unfair contract terms regime under the Competition and Consumer Act 2010 (Cth) (ACL); and
2. amends both the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) and the ACL to impose penalties on individuals and corporations for proposing or relying on unfair contract terms.

The changes will come into effect on 9 November 2023 giving businesses time to update their contracts and terms and conditions to ensure they are compliant with the changes.

What contracts will the changes apply to?

The Bill applies to unfair contract terms found in contracts which are either a small business contract or consumer contract and in a standard form.

The Bill changes how a court decides whether a contract is a “standard form contract”. When deciding whether a contract is a standard form contract, a court must also consider whether one of the parties has made another contract, on the same or substantially similar terms and, if so, how many contracts that party has made.

The Bill also expands the definition of small business to capture entities with up to 100 employees (increased from 20) or with up to $10 million annual turnover.

For contracts to which the ACL applies, the Bill removes the financial thresholds that currently apply and instead, the laws will apply to any standard form contract with a ‘small business’.

For contracts to which the ASIC Act applies, the Bill increases the financial threshold from $3 million to contracts with an upfront value of up to $5 million.

The changes will apply to contracts made on or after 9 November 2023, existing contracts renewed on or after that date, and terms of existing contracts that are varied after that date.

What is an unfair contract term?

A term of a standard form contract is unfair if it:

• would cause a significant imbalance in the parties’ rights and obligations under the contract;
• is not reasonably necessary to protect the legitimate interests of the advantaged party; and
• would cause detriment (whether financial or otherwise) to the small business if relied on.

What are the changes where an unfair contract term is found?

The Bill increases the consequences for parties found to breach the unfair contract terms laws in both the ACL and the ASIC Act:

Penalties:

Currently, a contractual term found to be unfair is void, but there are no pecuniary penalties for the party trying to enforce the term. The Bill will impose substantial pecuniary penalties to a person who proposes, applies, or relies on an unfair term. 

For companies, the maximum penalty under the Bill has increased to the greater of:

• AUD $50 million;
• 3 times the value of the benefit; or
• 30% of the adjusted turnover during the breach turnover period (if a court cannot determine the value of the benefit). 

For individuals, they may be exposed to a maximum penalty of AUD $2.5 million. 

Powers of the Court 

Prior to the Bill, the primary consequence for the use of unfair contract terms was that the unfair terms would be found void. In addition to this, the Bill also allows a Court: 

• to void the entirety (or any relevant part) of the contract;
• to vary the contract to remove the unfair term, or
• to refuse to enforce the unfair term.

In addition to the current injunction powers, the court can make an injunction restraining a person from entering into any future contract that contains a term that is the same or similar in effect to a term that has been declared an unfair contract term or applying, or relying on, a term in any existing contract that is the same or similar in effect to a term that has been declared unfair, whether or not that contract is before the court.

What does this mean?

The ACCC has indicated in its 2023-24 Compliance and Enforcement Priorities that it will be prioritising enforcement of the Bill. Businesses should expect that the ACCC will be active in enforcing and prosecuting businesses who do not comply with the Bill.

All businesses using standard form contracts or standard terms and conditions should review and update their standard form contracts prior to the changes coming into effect in November 2023.

Coulter Legal can assist to review your existing terms and conditions and agreements to ensure compliance with the Bill or draft new terms and conditions tailored to your business needs.