Beware of unfair contract terms

Significant increases to competition and consumer law penalties have commenced and sweeping reforms to the unfair contract terms regime will follow in 12 months’ time.

Get ready, the ACCC has just been given a much bigger stick! What do these changes mean for Australian businesses? What are the key considerations for lawyers?

Luba Poukchanski, our expert legal writer for LexisNexis Practical Guidance Consumer unpacks the issues in detail, in the article below.

The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (the Act) received Royal Assent on 9 November 2022. The Act implements significant changes to the Competition and Consumer Act (CCA), the Australian Consumer Law (ACL) and the consumer protection provisions of the Australian Securities and Investments Commission of the Act (ASIC Act).

Penalties have increased five-fold for competition and consumer law breaches

Schedule 1 of the Act amends the CCA (including the ACL) to increase five-fold the maximum civil and criminal penalties applicable to certain competition and consumer law breaches with effect on and from 10 November 2022.

This follows the announcement of the new Labour Government’s “Better Competition” policy and consultation undertaken in August this year on the exposure draft Treasury Laws Amendment (Competition and Consumer Reforms No. 1) Bill 2022: More competition, better prices which foreshadowed these changes.

Maximum penalties for both offences and civil penalty provisions in relation to Parts IV (Restrictive trade practices) IVBA (News Media and Digital Platforms Bargaining Code) X (International liner cargo shipping) XIB (The Telecommunications Industry: Anti-competitive conduct and record-keeping rules) and XICA ( the electricity industry) of the CCA as well as all maximum penalties for offences and civil penalty provisions in the ACL will increase for both corporations and non-corporate persons.

For corporations, penalties will increase from the current maximum of the greater of:

• $10 million,
• three times the value of the benefit obtained; or
• if the value of the benefit cannot be determined 10% of annual turnover.

To the greater of:

• $50 million,
• three times the value of the benefit obtained; or
• if the value of the benefit cannot be determined, 30% of the adjusted turnover during the breach turnover period.

The adjusted turnover is the sum of the value of all the supplies that the body corporate (and any related body corporate) has made or is likely to have made during the breach turnover period, with some exceptions (such as supplies made between related bodies corporate, supplies that are not made in connection with the body corporate’s business, supplies that are input taxed, or supplies that are not for consideration and are not taxable).

The breach turnover period will generally begin at the start of the month in which the contravention or offence began and end at the end of the month in which the offence or contravention ceased (or the body corporate was criminally charged). However, the minimum breach turnover period will be 12 months.

The Explanatory Memorandum notes that the increase to percentage turnover under the third limb “is necessary as the sum required to achieve the deterrence objective will generally be larger where the corporation has greater resources…[and]…will ensure that sufficiently large penalties are available, and a penalty cannot be considered an acceptable cost of doing business”.

For individuals and non-corporate bodies, penalties will increase from the current maximum of $500,000 to $2.5M.

Sch 1 commenced the day after Royal Assent and applies to all offences or contraventions that take place on or after that date.

The maximum penalties for contraventions of the Consumer Data Right regime and mandatory industry codes under the CCA will not change. Penalties for breach of the secondary boycott provisions of the CCA will also remain unchanged, except for secondary boycotts that cause a substantial lessening of competition.

New prohibitions and penalties will apply for unfair contract terms

Schedule 2 of the ASIC Act to strengthen and expand the scope of unfair contract terms (UCT) protections. The amendments in Schedule 2 will take effect from 9 November 2023 after Royal Assent and will apply to standard form contracts that are made or renewed at or after the commencement date and to contract terms varied after that date.

Changes to the UCT regime have been on the horizon for some time. The ACCC and consumer lobby groups such as Choice and have long advocated for unfair contract terms to be made illegal and subject to civil penalties, rather than merely void and unenforceableFollowing stakeholder consultation by Treasury, the then Federal Government reached agreement with State governments to implement these reforms. In 2021 Treasury released exposure drafts of the proposed legislation and undertook further consultation. A prior Bill to enact the reforms was introduced into Parliament in February this year but lapsed at the dissolution of the last Parliament. Schedule 2 of the Act mirrors the provisions of that Bill.

Expanded application of the unfair contracts terms protections will apply to B2B contracts

The Act significantly broadens the application of the UCT regime in business-to-business transactions:

• The headcount threshold which determines whether a business may be considered a “small business” and thus eligible for UCT protections is raised from the fewer than 20 employees to fewer than 100, and a new annual turnover threshold of $10M has introduced as an alternative measure. The Act also clarifies how employees are to be counted, introducing a pro-rata assessment for staff employed on a part-time basis. The Explanatory Memorandum states that this is intended to “more accurately reflect the reality of many small businesses and provide certainty as to which contracts will be covered by the regime”.

• The upfront price payable thresholds are removed as criteria for determining whether a contract is a small business contract for the purposesof the ACL. The Explanatory Memorandum notes that these price thresholds have been eroded by inflation over time and are now too low to effectively reflect the range of contracts entered into by small businesses, these value thresholds do not accommodate small businesses in industries where high value contracts with low profit margins are common as a matter of course. The Act retains an upfront price threshold for contracts relating to financial products and services regulated under the ASIC Act, however it increases this from the current $1 million to $5 million. The Explanatory Memorandum notes that the new $5M figure is consistent with the Australian Financial Complaints Authority’s exclusion of complaints about small business credit facilities that exceed $5M.

When is a contract a standard form contract?

Unfair contract term provisions apply only to terms in “standard form” contracts – that is, template contracts presented on a take it or leave it basis without an effective opportunity for the consumer or small business to negotiate or amend them. Courts must take a number of factors into account in determining whether a contract qualifies as a standard form contract. The Act inserts an additional factor into this list of criteria. This is whether the respondent has previously entered into contracts that are the same or substantially similar as the contract at issue and how many times that has occurred. Ostensibly the effect will be that the more repeatedly a contract has been used, the more likely it will be considered a standard form contract.

It also clarifies that for the purposes of assessing whether a contract is a standard form contract, the   court must disregard the following three factors:

• whether the consumer or small business had an opportunity to negotiate “minor or insubstantial” changes to the contract terms;
• whether the consumer or small business had an opportunity to select a term from a range of pre-determined options; and
• whether other consumers or small businesses were given an effective opportunity to negotiate similar contracts – for example, if a small subset of consumers or small businesses are given an effective opportunity to negotiate the terms of contracts that are issued on a take it or leave it basis to a broader group.

The overall effect of these changes will be to make it easier for both regulators and private parties to claim that contracts are standard form contracts and so subject to UCT protection, and more difficult for entities relying on the contracts to claim that they are not.

New prohibitions on unfair contract terms

Schedule 2 introduces two new prohibitions on unfair terms in standard form contracts with consumers and small businesses:

• entering into a standard form contract containing an unfair term; and
• applying or relying on (or purporting to apply or rely on) an unfair contract term – this means to give effect to, or seek to enforce, an unfair term of a contract.

With penalties and other remedies for contravention (see below). The Act provides that each individual unfair term in a standard form contract will constitute a separate contravention. Each instance of relying or purporting to rely on an unfair term will also constitute a separate contravention. Accordingly, each instance of an unfair contract term may entail at least two contraventions – entering into the contract and relying or purporting to rely on the term. There can also be multiple contraventions if the same unfair terms are relied upon on multiple occasions.

The Explanatory Memorandum explains that “while this could result in a high theoretical maximum penalty, a court will apply existing principles regarding the assessment of the pecuniary penalty to be imposed, to ensure that the total quantum of penalties is appropriate.”

New penalties will apply for unfair terms in standard form contracts   

The new prohibitions are backed by maximum civil pecuniary penalties for breach which are in line with the newly increased penalties introduced by Schedule 1 of the Bill, so that they remain consistent with the other penalties for ACL breaches.

For breaches of the UCT provisions under the ASIC Act, the maximum penalties will be in line with existing maximum penalties for breaches of the ASIC Act and Corporations Act; i.e., for corporate bodies the greater of 50,000 penalty units three times the benefit derived and determined avoided by the contravention or 10% of annual turnover, capped at 2.5 million penalty units, and for individuals 5,000 penalty units or three times the benefit derived and determined avoided by the contravention.

The Explanatory Memorandum notes that “The maximum civil penalty amounts are intended to apply in “most egregious instances of noncompliance with the new unfair contract terms provisions and thus are “intentionally significant… in line with the penalties for other breaches of the ACL (as amended by Schedule 1) and ASIC Act” and also comments that notwithstanding the introduction of these significant new penalties “the Government’s expectation is that regulators will continue to take a reasonable and proportionate approach to enforcing the unfair contract terms provisions, including affording businesses an opportunity to respond to allegations of unfair terms before commencing any legal proceedings.”

Extensive additional remedies for both regulators and private parties

The Bill maintains the existing framework allowing a court to declare a standard form contract term to be unfair with the effect that the term is then automatically void, but also introduces extensive additional remedies for both regulators (i.e., the ACCC and ASIC) and affected small businesses and consumers in relation to breaches of the UCT prohibitions that are not available for other breaches of the ACL or the ASIC Act:

• Under the pre-existing provisions in ss 237 and 239 of the ACL , affected consumers or small businesses (and regulators, on behalf of parties or classes affected non-parties to proceedings) may seek orders to void, vary or refuse to enforce all or part of a contract containing an unfair term, as well as any collateral agreement, and to prevent or redress loss or damage that has occurred or is likely to occur as a result of the respondent applying or relying upon an unfair term. The Act retains these provisions but also introduces a new s 243A allowing either an affected party or a regulator to seek orders to prevent, reduce or redress loss or damage that is likely to be caused to any person by the declared unfair term itself.  This new provision is arguably wider in scope.
• Under the new s 243B, regulators also gain the ability to seek orders to prevent loss or damage that is likely tobe caused to any person or class of persons (including non-parties) in relation to a term in any existing contract to which the respondent is a party that is the same or substantially similar in effect to a term declared unfair, including a contract not subject to the proceedings before the court.
• s 243B also enables regulators to seek injunctions preventing a respondent from entering into a future standard form contract that contains a term that is the same or substantially similar in effect to the term declared unfair and void or applying or relying upon such a term in any future standard form contract.

The extension of remedies to both future and existing contracts that contain “the same or substantially similar terms”, including contracts that are not identifiable at the time that the order is made represents a very wide-ranging expansion of a court’s powers in relation to unfair contract terms and provides significant additional flexibility and scope to the ACCC and ASIC to pursue entities that repeatedly breach unfair contract terms prohibitions and places.

Schedule 2 of the Act makes technical amendments to the ACL and ASIC Act to clarify that remedies available to non-parties apply not just to consumers but also to non-party small businesses and extends the court’s power to issue public warning notices, adverse publicity orders and disqualification orders upon application by regulators.

Exclusion of certain contract types and terms from the UCT regime

Schedule 2 of the Act excludes certain types of contracts from the operation of the UCT regime for public policy reasons. These are:

• Operating and listing rules of licensed financial markets and clearing and settlement facilities (such as the ASX), including contracts made under or in accordance with those rules
• Operating rules of real-time gross payment or settlement systems approved by the RBA under the Payment Systems and Netting Act 1998 (i.e., RITS Austraclear and CHESS) or a contract made under or in accordance with these;and
• Legacy guarantee renewable life insurance policies and certain life insurance policies entered into prior to 5 April 2021 and subsequently replaced at the owner’s request or due to administrative error.

Schedule 2 also introduces amendments to both the ACL and ASIC Act to clarify that terms that result in other terms being read into or required to be included in a contract by operation of State or Federal law are exempt from being considered unfair for the purposes of the UCT provisions.

What do these changes to unfair contract laws mean for Australian businesses?

These changes will affect most Australian businesses regardless of their size or the industry they operate in. Standard form contracts are almost ubiquitous. Overseas entities that supply goods or services to Australian businesses and consumers will also be affected.

Small businesses will be impacted as both as purchasers and as supplier of goods and services. They must review their own standard form contracts with other small businesses to ensure that they do not contain any unfair terms and, once the changes commence, should also review standard form contracts offered to them by their suppliers and service providers to flag or challenge any terms that they consider might fall foul of the prohibitions.

Businesses that may never have dealt with unfair contract terms provisions (because they operate solely in the B2B space and contract with other businesses that have more than 20 employees) will now have to be cognisant of unfair terms in their standard form contracts, given the greatly expanded scope of application.

In light of these significant and wide-ranging reforms to the UCT regime, combined with substantial increases to penalties for ACL contraventions, businesses and their legal advisors should ensure consumer law compliance remains a key priority.

What are the key considerations for lawyers, including in-house legal counsel?

• Be prepared, but don’t panic. There is a year’s grace period until the commencement of the unfair contract terms provisions on 9 November 2023.
• If you haven’t already done so establish a process to conduct a thorough review and audit of all of the businesses’ standard form contracts for potentially unfair terms and replace or amend them as needed. The length and complexity of this process will depend on the nature and size of the business and the complexity and variety of contracts that it uses. Advice or assistance from outside counsel may be required depending on the inhouse team’s capacity and expertise. Prioritise those contracts that are used most extensively and terms that are unilateral in nature, create an imbalance or rights and obligations and/or are of the kinds included in the “grey list” set out in section 25 of the ACL.
• When assessing terms that may be at risk of being deemed unfair (for example because they fall into the “grey list”, or otherwise appear unilateral or disproportionate or unduly onerous in nature:
  • Consider whether the term or terms in question protect legitimate business interests – that is, what is the purpose of the term? What loss, detriment or risk does it seek to address or mitigate for the business?  Then, assess whether the term is “reasonably necessary” to protect those interests – that is, is the term a reasonable and proportionate response to that detriment or risk? Is there an alternative way to protect business interests that is less burdensome on the consumer or small business? It would be prudent to proactively gather documentation and evidence justifying the rationale for potentially contentious terms in the event they are later challenged.
  • Weigh the utility of the terms against the risk that they will be challenged as unfair and the resultant expense and business disruption. Even if the business is ultimately successful in legal or regulatory proceedings, the legal and reputational costs can be significant.
  • Ensure all standard form contract terms, and especially those at greater risk of being challenged for unfairness, are as transparent as possible. This will not prevent a term from being declared unfair, but it does mitigate the risk.
  • Institute a process for checking whether your counterparty is a “small business” per the newly expanded definition – this will involve asking the counterparty to supply details of its employee headcount and turnover. Also determine if your own business is a small business for the purposes of the definition, as other businesses will be asking the same. If in doubt, or information is not available, it is prudent to assume that another business you are dealing with is a small business and the unfair contract terms protections apply. 98.4% of businesses in Australia fall within the definition.
  • Ensure that all standard form contracts entered into or renewed following the commencement date are in the reviewed and up to date form. Remove old versions of contracts from the intranet/ internal IT systems and educate staff on the need to ensure they download and use the most up to date contract templates rather than merely reuse the last contract they have (this is good practice in any event.)
• Be aware that upon commencement, there will be increased regulatory scrutiny of potentially unfair contract terms and unfair contract terms will become an area of enforcement focus for both the ACCC and ASIC. Regulators are likely to launch market surveillance and may focus their attention on particular industries or businesses where unfair contract terms have historically been more prevalent. Regulators have long advocated for these provisions and will want to test the expanded powers provided under the regime and make an example of particularly egregious conduct.
• The financial and reputational risk of contravening the new unfair contracts provisions will now become much more significant, and unfair contracts provisions must become a key compliance priority for all businesses. Indeed, there is a renewed impetus to focus on both Competition and Consumer law compliance more broadly given the vastly increased civil and criminal penalties breach of other prohibitions.
• Going forward, considerations regarding whether particular terms may be at risk of being challenged as unfair must become a more prominent consideration in drafting new contracts. This may also have applications in conducting due diligence in the context of a business purchase or M&A transaction.

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