Unfair contract terms – Commonwealth government driving major reforms

On 28 September 2022 the Commonwealth government introduced to Parliament a bill that will, if passed, make major changes to the unfair contract terms regime in Australia.  The bill is called the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022.

The unfair contract terms provisions in the Bill are virtually identical to the provisions of a bill that was introduced to Parliament earlier in 2022, but which lapsed when the election was called.  However one significant difference is that the maximum penalties associated with unfair contract terms will be much higher under the new Bill.

The Bill contains amendments to the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) that aim to strengthen the existing unfair contract terms provisions, expand the class of contracts covered and introduce civil penalty provisions.

The government considers that the current regulatory regime is not acting as a sufficient deterrent to businesses, with unfair terms still prevalent in standard form contracts. Our own observation is that there are indeed many unfair contract terms still in the marketplace in standard form contracts. Bearing in mind the new civil penalty provisions, which could see large penalties apply, businesses should now look to review their standard form contract terms.

Key changes proposed

The current unfair contract terms regime is contained in the ACL and, for financial products and services, in the ASIC Act. The regime applies to a ‘standard form contract’ that is a ‘consumer contract’ or ‘small business contract’ as defined under the regime. Further details regarding what types of contracts the regime applies to can be found in our previous article here.

The key changes to the current unfair contract terms regime under the Bill are:

1. An unfair contract term will no longer be simply void and unenforceable – it will be unlawful and the courts will be able to impose a remedy such as a civil penalty. Courts will also be able to make orders to vary or refuse to enforce a contract in order to prevent likely loss or damages. This will significantly raise the risk for businesses. Consumer advocacy groups, and regulators such as the ACCC, have advocated for this change to provide a stronger incentive to businesses to remove unfair terms from their standard form contracts.

For a company, the maximum amount of the penalty will be the greater of:

• $50 million;
• three times the value of the benefit the company (and any related company) obtained from the breach of the law (if the court can determine the value of that benefit); or
• if the court cannot determine the value of that benefit, 30% of the company’s (and any related company’s) turnover during the breach period (with 12 months being the minimum period).

For a person other than a company (e.g. a sole trader or partnership), the maximum penalty will be $2.5 million.

Further, each unfair contract term in the same contract will give rise to a separate breach of the law and at least theoretically, could trigger a separate penalty.

More broadly the Bill will increase maximum penalties for various breaches of the Competition and Consumer Act 2010 (Cth), including the ACL, along similar lines to the above.  Our previous article here provides further information.

2. Many more contracts will be considered ‘small business contracts’.

Essentially, a business contract will fall within the regime if one party to the contract (importantly, this could be either the supplier or the customer) has either:

• fewer than 100 employees; or
• annual turnover below $10 million.

However under the ASIC Act (which applies in relation to financial products and services) there will be an additional requirement that must be met, being that the upfront price payable under the contract does not exceed $5 million.

3.  A contract may be considered a ‘standard form contract’ despite the opportunity for:

• a party to negotiate minor changes to the contract;
• a party to select a term from a range of options provided; or
• a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract. This is to clarify that if some (but not all) consumers or small businesses can negotiate the terms of a contract that is issued to them, the contract could still be a standard form contract.

4. Certain types of contracts will be excluded from the unfair contracts regime:

• the operating rules of licensed financial markets;
• the operating rules of licensed clearing and settlement facilities;
• real time gross settlement systems approved as payment and settlement systems by the Reserve Bank of Australia; and
• certain life insurance contracts.

Timing of the changes

If passed by the Commonwealth Parliament, the amended unfair contract terms regime will take effect 12 months after the legislation receives the Royal Assent. It will then apply to standard form contracts that are new or renewed. Otherwise it will not apply to existing standard form contracts, except to terms that are amended after the legislation commences.

This 12 month period is to allow businesses time to make necessary changes to comply with the updated regime.

What next?

Businesses should immediately start planning to implement a project to:

• identify all of their contracts that might be considered ‘standard form contracts’ that are entered with consumers or small businesses, for example standard terms of sale, app licensing terms, leases, loan agreements or standard purchase order terms; and
• have them reviewed and amended to remove any ‘unfair’ terms, whilst minimising any commercial disadvantage to the business from these amendments. For a large business that may use numerous template agreements and sets of standard terms across its operations, this could be a substantial project.

Given the likelihood that the legislation will be passed, and that lawyers with suitable expertise will be kept very busy throughout the 12 month ‘grace period’ reviewing large numbers of standard form contracts, we recommend that businesses kick off their review projects as soon as possible.

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Authored by:

David Smith, Partner
Eve Lillas, Associate