Date set for ‘unfair contract terms’ to be rendered unlawful: Time to act

Businesses now have less than 12 months to cease using unfair contract terms in their standard form consumer contracts and small business contracts, now that the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) has received the Royal Assent. Whereas unfair contract terms can presently be rendered void and unenforceable, the use of unfair contract terms in standard form contracts made or varied from 9 November 2023, will expose users of those contracts to potentially significant penalties, as foreshadowed in our earlier Legal Insight.

Businesses should prioritise within this period a review of all standard form contracts that they use with either consumers or small businesses, conscious also of the expanded definition of ‘small business contract’. It is also a timely opportunity for businesses who supply consumers in New South Wales to review their terms and conditions for compliance with their additional disclosure obligations.

Unfair contract terms to be rendered illegal

What is a standard form contract?

The Australian Consumer Law (ACL) does not expressly define what a ‘standard form contract’ is. However, the court’s default presumption will be that a contract is a ‘standard form contract’. The burden will be on, in effect, the party proposing the contract to prove otherwise.

The ACL does set out a number of factors that a court is obliged to consider. Notably, the Amending Act now goes further to confirm that a contract can be regarded as 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.

What is a ‘consumer contract’?

A ‘consumer contract’ is a standard form contract for a supply of goods or services, or a sale or grant of an interest in land, to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

The definition of a ‘consumer contract’ is reasonably well understood, and will not be changed by the Amending Act.

What is a ‘small business contract’?

The concept of a ‘small business contract’ will be changed materially by the Amending Act and will now likely catch many more dealings where a standard form contract is used.

A ‘small business contract’ will exist where the standard form contract is either:

• for a supply of goods or services, or a sale or grant of an interest in land; or
• in the case of financial products and contracts for the supply of financial services, has an upfront price that does not exceed $5,000,000;

and at least any one party to the contract either:

• makes the contract in the course of carrying on business and at a time when the party has fewer than 100 employees; or
• had annual turnover below $10 million.

Are all standard form contracts affected?

The amendments to the unfair contract terms regime will not apply to contracts made before 9 November 2023 – the existing regime will continue to apply, which could still allow unfair contract terms to be rendered void – however any existing contract renewed on or after 9 November 2023 will become subject to the new regime and any amendment made on or after 9 November 2023 will also be subject to the new regime.

For contracts being made on or after 9 November 2023, there will be very limited exceptions to the application of the new regime. It is prudent for businesses using any form of document that has characteristics akin to those described above to be assuming that their document is affected and to take advice accordingly.

What is an unfair contract term?

The concept of a term being ‘unfair’ has not changed – it will be regarded as ‘unfair’ if it has all of the following features:

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

What terms are excluded from the regime?

A term cannot be regarded as unfair where the term:

• defines the main subject matter of the contract; or
• sets the upfront price payable under the contract; or
• is required, or expressly permitted, by a law of the Commonwealth or of a State or Territory; or
• the term is included in the contract, or is taken to be so included, by operation of such a law that regulates the contract; or
• the term’s inclusion has the result of either or both:
  • one or more other terms are included in the contract, or are taken to be so included, by operation of a law of the Commonwealth, or of a State or Territory, that regulates the contract; and/or
  • such a law requires one or more other terms to be included in the contract; or
• in the case of Insurance Contracts Act insurance contract, is a transparent term and:
  • is disclosed at or before the time when the contract is made; and
  • sets an amount of excess or deductible under the contract.

The Amending Act will now provide comfort for those users of standard form contracts where a term is, in effect, deemed or incorporated into the contract because of Australian statute. This will be of relevance to, for example, landlords of retail premises where retail leasing legislation imposes or incorporates provisions in a retail lease.

What are the potential penalties?

For the first time, the use of an ‘unfair contract term’ can attract civil penalties where pursued by a regulator before the courts. For a body corporate, the maximum penalty will be the greater of:

• $50 million;
• three times the value of the benefit the body corporate (and any related body corporate) obtained from using the unfair contract term; or
• if the court cannot determine the value of that benefit, 30% of the corporate group’s ‘adjusted turnover’ during the ‘breach turnover period’.

For a person other than a body corporate, the maximum penalty will be $2.5 million.

See our other recently published Legal Insight for more information on changes to the penalties regime in competition and consumer law.

Further, a court can make other orders to void, vary or refuse to enforce part, or all, of a contract (or collateral arrangement); make orders that apply to any existing standard form contract (whether or not that contract is put before the court) that contains an unfair contract term that is the same or substantially similar to a term the court has declared to be an unfair contract term; and issue injunctions with respect to existing or future standard form contracts that contain a term that is the same or is substantially the same as a term the court has declared to be an unfair contract term.

What should businesses be doing now?

While an ‘unfair contract term’ can, at times, be in the eye of the beholder, the potential consequences for getting it wrong could be significant. Businesses should therefore be:

• identifying all contracts they use that have the potential to be regarded as ‘standard form contracts’, regardless of what they may be named and how they may be presented; and
• having those reviewed for any terms that may be at risk of being an ‘unfair contract term’, and
• taking steps, where possible, to address that risk.

If you require assistance with reviewing any contracts of concern or needing advice on the consequences of this significant upcoming change in law, Gadens has extensive experience in guiding businesses through these issues.

Additional disclosure obligations when suppling to consumers in NSW

As also canvassed in FMCG Express in 2020 and our Legal Insights earlier this year, suppliers of goods and services to consumers in New South Wales, whether from a physical location or online, are also obliged to take reasonable steps to ensure that, prior to the supply of the goods or services, a consumer is aware of the substance and effect of certain terms that may substantially prejudice the interests of the consumer.

Section 47A of the Fair Trading Act 1987 (NSW) obliges a supplier, before supplying a consumer with goods or services, to take reasonable steps to ensure the consumer is aware of the substance and effect of any term or condition relating to the supply of the goods or services that may substantially prejudice the interests of the consumer. At a minimum, such terms will include any terms that:

• exclude the liability of the supplier;
• provide that the consumer is liable for damage to goods that are delivered;
• permit the supplier to provide data about the consumer, or data provided by the consumer, to a third party in a form that may enable the third party to identify the consumer; and
• require the consumer to pay an exit fee, a balloon payment or other similar payment.

This is not an exhaustive list. Other provisions that could be caught by this regime may arguably include:

• automatic rollover clauses;
• minimum notice provisions for termination; and
• clauses prescribing a jurisdiction outside of the state.

It is important to note that terms that are not ‘unfair’ for the purpose of the Australian Consumer Law’s ‘unfair contract terms’ regime may still be regarded as substantially prejudicial under New South Wales’ Fair Trading Act and therefore require enhanced disclosure.

It is therefore timely also for businesses that supply into New South Wales to reflect on both their hard copy terms and conditions, and any online terms they may be using, to ensure they adequately call out those terms and conditions that ‘substantially prejudice’ the interests of consumers.

Otherwise, contravention can attract a maximum financial penalty of $110,000 for corporations and $22,000 for individuals. In addition, a court has other broad powers, including many of the powers afforded to it under the Australian Consumer Law as well as the power under the Act to make compensation orders. Alternatively, NSW Fair Trading can utilise the penalty notice regime to issue a penalty notice of, for a corporation, $1,100 per offence or, for an individual, $550.

Authored By:

Adam Walker, Special Counsel

The commencement date for the amendments to the unfair contract terms regime has been amended to 9 November following a change in the date previously communicated by the Australian Competition and Consumer Commission.