The law regarding unfair contract terms in Australia changed as of 9 November 2023. Amongst the changes, businesses which propose, use, or rely upon an unfair contract term may be liable for substantial penalties of up to (and in some cases beyond) $50 million. The changes also increase the class of contracts subject to the prohibition on unfair contract terms. This article examines the current law on unfair contract terms and the recent changes.
Unfair contract terms
Under the Australian Consumer Law (ACL), certain standard form contracts must not contain unfair terms.
Before the most recent reforms, this prohibition applied to contracts with an individual or a “small business”, which was previously defined as a business that employs fewer than 20 people, where any upfront price payable under the contract does not exceed $300,000 (or, if the contract is for more than 12 months, $1 million).
A standard form contract is a contract which is offered by one party to another on a ‘take it or leave it basis’, meaning that the contract was prepared by the first party and presented to the second party with little or no opportunity to negotiate its terms. Other relevant factors include the respective bargaining position of the parties and whether the terms of the contract take into account any specific features of the second party. Examples of standard form contracts include many contracts for the supply of consumer goods and services such as gym memberships.
Under the former regime, a contractual term was considered to be “unfair” if it:
- caused a significant imbalance in the rights and obligations of the parties;
- was not reasonably necessary to protect the legitimate interests of the party seeking to rely upon it; and
- would cause financial or other harm to the other party if enforced.
The ACL provided a non-exhaustive list of contract terms that may be unfair, including terms that:
- allowed only one party to end the contract;
- limited the liability of only one party;
- penalised only one party for terminating the contract; and/or
- allowed only one party to unilaterally change the contract
The unfair contract term provisions do not apply to terms that specify the upfront price to be paid under the contract or define the main subject matter of the contract.
If a term is found to be unfair, the Court will declare it void, meaning that it does not apply to the parties to the contract. If the term can be severed, the remainder of the contract will continue to apply.
Changes to the law on 9 November 2023
As of 9 November 2023, pursuant to the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), the law as set out above changed in several significant ways:
- If the Court finds a contract term to be unfair, in addition to declaring the term void, the Court may also order financial penalties against the party seeking to rely upon the term. In the case of a business, penalties may be up to the greater of $50 million, three times the value of the benefit obtained from the conduct or, if the Court cannot determine the benefit, 30% of adjusted turnover during the breach period. In the case of an individual, penalties may be up to $2.5 million.
- The definition of “small businesses” changed, so that it captures businesses with 100 or fewer employees (rather than 20) and/or that make less than $10 million in annual turnover.
- When considering whether a contract is a standard form contract, the Court will also consider how often the party which prepared the contract has made other contracts with other parties that are the same or very similar.
- The amendments also clarify that a contract can be a standard form contract even if the second party had the opportunity to negotiate minor changes, was asked to select from a range of options, and/or negotiated the contract through a third party.
- The Court has been given a broader range of powers to redress the harm caused by an unfair contract term, including the power to grant an injunction preventing the person from making future contracts that include the unfair term, and to make any other orders that the Court considers appropriate to reduce further damage caused by the term.
The changes do not apply to standard form contracts entered into before 9 November 2023. The new law applies to any standard form contracts made or renewed on or after 9 November 2023, and standard form contracts where a term is varied or added on or after 9 November 2023. In the latter case, the new laws regarding whether a contract is a standard form contract will apply to the whole contract, not merely the term which has been varied or added.
Recommendations for businesses
Businesses should review their standard form contracts because:
- A Court can now impose significant financial penalties for parties seeking to rely upon unfair contract terms, whereas previously a Court could only declare the term in question to be void.
- A contract which was previously not a standard form contract may now be considered a standard form contract, as a result of the additional factor and clarifications in the new laws.
- A standard form contract which was not previously subject to the unfair contract laws on the basis that it is used with businesses other than small business may now be subject to the unfair contract laws, as a result of the changes to the definition of “small business”.
The ACCC has provided some guidance for businesses in conducting this review, including that businesses should:
- consider the term in question from the other party’s point of view when considering whether the term is necessary to protect the business’ legitimate interests;
- include appropriate counter-balancing terms, for example, allowing customers to exit the contract without penalty if the business unilaterally changes the contract (if they have the power to do so);
- ensure that terms are only as broad as reasonably necessary to protect the business’ legitimate interests;
- ensure that they meet their obligations under the ACL, including not purporting to limit customers’ consumer guarantee rights;
- use clear and simply language; and
- ensure that terms are clearly drawn to the attention of customers during the sign-up and renewal processes.