Unfair contract terms regime expanded in Australia

Today, the unfair contract terms (UCT) amendments enter into force. With the expansion of the application of the regime and the introduction of penalties, these reforms significantly increase the regulatory risk for any entity that enters into standard form contracts with small businesses or individuals.

The Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) regulates UCTs in financial products and contracts for the supply or possible supply of financial services. The Australian Consumer Law (ACL) in the Competition and Consumer Act 2010 (Cth) regulates UCTs in contracts for the supply of all other goods and services.

Schedule 2 of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) Act, which passed Parliament in October 2022 and which enters into effect today, introduces a number of amendments to the existing ASIC Act and ACL UCT regimes.

The amendments apply to:

• standard form consumer contracts and standard form small business contracts that are entered into or renewed (whether automatically or manually) from 9 November 2023, and
   
• terms in standard form consumer contracts and standard form small business contracts that are varied from 9 November 2023.

Overview of key changes

The test for determining unfairness has not changed. However, key definitions, including the definition of a “small business contract”, have been significantly widened. The upshot is that a broader range of contracts will now fall within the scope of the UCT regime.

The key amendments include the following:

Expanding the small business contracts definition:

The definition of a small business contract will now cover contracts where at least one party to the contract:

• makes the contract in the course of carrying on a business, and at a time when they have fewer than 100 employees (up from 20 employees), and/or
   

• has a turnover for the last income year of less than A$10,000,000.

Removal of upfront price payable requirements:

The duration-based upfront price payable requirements have now been removed. For financial products and contracts for the supply or possible supply of financial services, the UCT regime will only apply if the upfront price payable is less than A$5,000,000. There is no upfront price requirement for other types of contracts.

New civil offences for making and relying on unfair terms

A person will contravene the UCT regime if they rely, or purport to apply or rely, on an unfair term. A person will also contravene the UCT regime if they make a contract containing an unfair term, but only if they proposed it.

The maximum civil penalties are:

Damages and compensation orders:

A person who suffers loss or damage because of a contravention of the UCT regime can now, by civil action, recover certain causally connected losses from the primary contravenor or from any other person involved in the contravention.

In addition, compensation orders are now available under the ACL. In determining whether to make a compensation order, a court may consider the conduct of the parties to the proceeding since the contravention occurred.

Ancillary relief:

If a court declares an unfair term to be void, the court may also, on application by a party to the contract, make further declarations to redress loss or damage caused by the UCT or to prevent or reduce further likely loss or damage.

A court can:

1. declare a contract or part of a contract void (or void ab initio),
    
2. vary the contract and declare the variation to have had effect from a date (including a date pre-dating the declaration), and
    
3. refuse to enforce certain provisions of the contract.

New mandatory consideration:

The UCT amendments introduce a new mandatory consideration for assessing whether a contract is a standard form contract. The courts must now consider whether one of the parties to the relevant contract has prepared another contract on the same or substantially similar terms, and if so, how many of those contracts were made.

Clarifying standard form contracts:

The amendments clarify that a contract can be a standard form contract despite there being:

1. an opportunity for a party to negotiate changes to terms that are minor or insubstantial in effect,
    
2. an opportunity for a party to select terms from a range of options determined by the other party, and
    
3. an opportunity for a party to another contract (or proposed contract) to negotiate terms of the other contract (or proposed contract).

Clarifying exempt terms that are required by law:

The amendments clarify that the UCT regime will not apply to terms that are required or expressly permitted by law, read into the contract by operation of law, or that result in other terms being read into or being required to be included in the contract.

Are you ready?

This area of law has received a significant amount of regulatory attention in recent years, a trend which we anticipate will continue well into the future.

In 2023, ASIC commenced three new enforcement proceedings against Auto & General, HCF Life and PayPal Australia, seeking declaratory relief in relation to a range of allegedly unfair terms.

The ACCC has continued to conduct investigations and secure court-enforceable undertakings, most recently against fertiliser suppliers.

If your business hasn’t yet done the work, now is the time to consider:

1. Are your contracts caught by the amended regime?
    
2. If so, are the terms in your contracts potentially unfair?
    
3. What changes can you make to your contracts to reduce the risk of being caught by the UCT regime?