New Penalties for Unfair Contract Terms: Is Your Business Compliant?

What is the unfair contract terms regime?

Australian law prohibits the use of unfair contract terms in standard form consumer contracts through the Unfair Contract Term (UCT) regime in the Competition and Consumer Act 2010. The UCT regime itself is not new. ASIC has administered the law dealing with UCT in standard form consumer contracts for financial products since July 2010, which was then expanded in November 2016 to include standard form small business contracts and then again in April 2021 to cover consumer and small business insurance contracts. Under these regimes, if the Court decided that a term was unfair, then it could be declared void and unenforceable.

What are the latest changes?

The latest update to the regime, effective from 9 November 2023, introduces financial penalties in addition to the term being void.

The maximum financial penalties for businesses found to be in breach of the updated UCT regime is the greatest of the following:

• $50 million;
• three times the value of the ‘reasonably attributable’ benefit obtained from the conduct, if the court can determine this; or
• if a court cannot determine the benefit, 30% of the adjusted turnover of the business during the breach period.

For individuals, the maximum penalty is $2.5 million.

In addition to the penalties under the Australian Consumer Law, penalties can also be applied under the Australian Securities and Investments Commission Act 2001 (ASIC Act) if unfair contract terms are contained in contracts for financial products and services.

Under both the ACL and the ASIC Act, the penalties are per unfair contract term. Therefore, it is possible for a business to be penalised a large number of times, if there are multiple unfair contract terms applied or relied on, across multiple contracts with multiple other parties. In other words, the penalties can quickly become costly.

What are standard form contracts?

The UCT applies only to standard form contracts.

In determining if a contract is a standard form contract or not, the Court has discretion to consider any matters it considers relevant. However, the Court must take into account the factors in section 27(1) of the Australian Consumer Law, which are:

• whether one of the parties has all or most of the bargaining power (e.g. this will usually occur if one party is a large business and the other party is a small business or an individual consumer);
• whether the contract was prepared by one party before the parties discussed the specific transaction (i.e. a boilerplate or template document with an absence of clauses drafted specifically for this transaction);
• whether the other party was required to accept or reject the terms of the contract (i.e. a ‘take it or leave it’ type deal);
• whether the other party was given an effective opportunity to negotiate the terms of the contract (the use of the word ‘effective’ is important. Allowing the other party to negotiate only minor terms is unlikely to mean that the contract is not a standard form contract); and
• whether the terms of the contract take into account the specific characteristics of the other party or the particular transaction (i.e. this suggests that the contract is not a boilerplate).

Also part of the changes under the new UCT regime under the Australian Consumer Law, at least one of the parties to the standard form contract must have fewer than 100 employees (increased from fewer than 20) or less than $10 million in annual turnover for the UCT (instead of the contract price threshold under the previous law).

In brief, a contract is likely to be a standard form contract if it is a standard set of terms and conditions that is issued to multiple individuals. As an example, in 2022, the Federal Court decided that Fujifilm had issued standard form contracts to thousands of small businesses, and those standard form contracts contained unfair terms.

What are unfair contract terms?

A contract term is unfair under section 24(1) of the Australian Consumer Law if:

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
• 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 (whether financial or not) to the other party if it were to be applied or relied on.

Again, the Court has discretion to consider other matters it considers relevant, based on the specific circumstances of the matter.

There is also a list of examples of what may constitute an unfair contract term in section 25 of the Australian Consumer Law which the Court may take into consideration when deciding if a term is unfair or not.

The aim of this section is to provide guidance to the Court, without being prescriptive. These include terms that allow only one party to:

• avoid or limit performance of the contract;
• terminate the contract;
• penalise for a breach or termination of the contract;
• vary the terms of the contract;
• renew or not renew the contract;
• vary the upfront price payable without allowing the other party to terminate;
• vary the goods or services supplied under the contract;
• assign the contract to the detriment of the other party;
• limits the ability to sue; or
• decide whether the contract has been breached.

The overarching theme in this list of examples is that a term is likely to be unfair if it is one-sided and allows unilateral rights to the more powerful party. However, the list is non-exhaustive. We can expect to see significant development in the case law as different sorts of potentially unfair contract terms are litigated on.

What should businesses do?

Businesses should have their standard form contracts reviewed in light of the updated unfair contract term regime. In March of this year, the ACCC Chair forewarned businesses that they will be “undertaking a review of business terms and conditions across a number of different sectors” and treating unfair contract terms as an enforcement priority.

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This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.