By Mark Armstrong, Solicitor
11 July 2023
Unfair contract terms impacting small business and consumers have been against the law for some time. But now, the clock is well and truly ticking before major updates which greatly affect standard form contracts involving small businesses and consumers shake things up considerably. The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (the “Act”) will be effective from 10 November 2023 and introduces huge fines for non-compliant standard form contracts, where previously no such fines existed. The Act has the goal of providing greater protections to consumers and small businesses operating under standard form contracts, so what is changing?
The Act’s explanatory memorandum notes that the purpose of the changes is to “strengthen and clarify the existing unfair contract terms provisions, and reduce the prevalence of unfair contract terms in consumer and small business standard form contracts.” We have previously touched on the significant impact the Act as a whole will have on a wide swathe of businesses (see our article here), but in this update, now that we know more, we specifically deal with how the Act will affect certain contracts regulated under the Competition and Consumer Act 2010 (Cth) (the “CCA”), including the Australian Consumer Law (“ACL”), which forms Schedule 2 of the CCA, and under the Australian Securities and Investments Commission Act 2001 (Cth) (the “ASIC Act”). The changes also add a formidable weapon to the arsenal of the Australian Competition and Consumer Commission (“ACCC”) and ASIC – court-imposed pecuniary penalties – which both regulators will be able to request to bring the pain to offenders.
Updates to certain definitions means that the changes will encompass more contracts, so the time to check whether the changes will affect you is now. The potential penalties are colossal and the consequences can be devastating, so make sure you do not leave it too late to iron out any unfair terms in the standard form contracts your business currently operates on with consumer and small business clients.
The changes contained in Schedule 2 of the Act will directly impact standard form contracts where one party is a small business or consumer. Standard form contracts are ones that are almost completely set (like a template) and used repeatedly by a business, often to minimise costs associated with bespoke contract drafting and negotiations. Generally, standard form contracts are provided by one party that has all or most of the bargaining power and usually operate on a ‘take it or leave it’ basis. Accordingly, it is not unusual for important terms in contracts of this type to heavily favour one party, leaving the other with very limited rights. Contract terms that create these circumstances are the exact type that the Act seeks to stamp out to ensure that businesses cannot take advantage of smaller players who simply do not have the resources or power to adequately review and negotiate standard contract terms. Once in force, the changes will cover more contracts and more businesses, and are designed to act as a greater deterrent to the use of unfair terms in standard form contracts.
Under the new regime, any individual or entity that is party to the contract is able to bring action against unfair contract terms. The previous position was that action was brought by ASIC or the ACCC. Further, if a term is alleged unfair, the onus is on the party seeking to rely on the term to prove the term is reasonable to protect the legitimate interests of the business, meaning that you would need to defend the inclusion of a term if it is alleged that the term is unfair. The best method to avoid this situation entirely is to ensure that all unfair terms are removed in the first instance. Below, we break down the key changes, what is really ‘unfair’ and how this impacts you.
Key changes to be aware of, and their consequences
- The Act applies to new contracts or renewed contracts made at the end of the initial 12-month grace period (i.e. from 10 November 2023).
- The Act’s definition of ‘small business contract’ has been expanded to cover any business with less than 100 full-time equivalent employees (previously 20) OR that has a turnover of less than $10 million for the last income year. All small business contracts regulated under the CCA are covered, regardless of the value, as are those regulated under the ASIC Act with a contract value not exceeding $5 million (previously, the value threshold was $300,000 or $1 million if the term was more than 12 months).
- In determining whether a contract is a ‘standard form contract’, a court will take into account whether the contract is used repeatedly, and may declare it to be so despite there being opportunity for:
- A party to negotiate minor/insubstantial changes;
- A party’s ability to select a term from a range of options determined by the other party; or
- A party to another contract/proposed contract to negotiate terms of the other contract/proposed contract.
- In other words, FAR more contracts will now be caught, both because the Act applies to more businesses and a greater range of contract values.
Fines will now potentially be issued for unfair contract terms
- Previously, there was no scope for a regulator to impose a pecuniary penalty related to unfair contract terms; the term was just declared void and was thus unenforceable. After the Act comes into force, the maximum penalty for a body corporate proposing, applying or relying on an unfair term (or purporting to do so) is the greater of:
- $50 million;
- If the court can determine the value of the benefit obtained – three (3) times that value; or
- If the court cannot, 30% of the body corporate’s adjusted turnover during the breach period for the offence, act or omission (previously 10% of annual turnover) – refer to our earlier article for further specific details on Adjusted Turnover and Breach Turnover Period.
For an individual, the maximum penalty is up to $2.5 million.
- Significantly, the above penalties apply to each unfair term. Further, each contract entered with an unfair term is a separate offence. By way of example, this means that if a contract contains two (2) unfair terms (and that contract has been entered into with three (3) suppliers), there could be six (6) pecuniary penalties to pay, stacked on top of each other. Depending on how egregious the clause is and how much the regulator deems punishment necessary, one can see how possible fines will escalate very quickly indeed.
Court enforceable consequences
- In addition to the above, a court will be able to:
- declare a term is void from the first day it was included in the contract;
- make orders to void, vary or refuse to enforce part or all of a contract (or a collateral arrangement) to prevent loss/damage likely to be caused. Further, the court is not required to consider that they will redress actual loss or damage; and/or
- make an injunction to prevent a party from:
- Relying on or applying a term in an existing contract that is the same or similar to any term a court has previously declared to be unfair (whether or not the existing contract is put before the court); and/or
- Entering a new contract with a term previously declared unfair by a court.
- make an order disqualifying a person from managing a corporation. In other words, those who impose the terms are likely to have significant professional and personal impacts from their decision to have unfair terms in the standard form contracts.
So what is ‘unfair’?
Section 24 of the ACL sets out the meaning of ‘unfair’ and notes that a consumer contract or small business contract is unfair if it:
- Would cause a significant imbalance in the parties’ rights and obligations;
- Is not reasonably necessary to protect legitimate interests of the advantaged party; and
- Would cause detriment (financial or otherwise) to a party if applied or relied on.
Examples of unfair terms include those that permit only one party to terminate, to avoid performance, to determine if a breach has occurred, to vary the contract, or to make unilateral decisions affecting all parties. Essentially, the division of rights between parties should be reasonably equitable and not overwhelmingly unbalanced, which can be demonstrated via the case examples below.
- In December 2022, Fowler Homes Pty Ltd (Fowler) had included a clause in their standard home building contract that: (a) prohibited clients from publishing any kind of disparaging remarks about Fowler (including online and on socials) without Fowler giving permission; and (b) required the client to indemnify Fowler against any loss suffered under for any such disparaging remarks.
- In March 2020, the standard form contract used by ‘1300 Australia’, a company who sold phone numbers that spell out words, contained several contentious terms including one clause that required small businesses to pay a termination fee of up to 92.5% of the total contract fees for early cancellation of the contract.
After ACCC investigation, both of these companies admitted that their contracts contained an unfair term.
Examples of terms which a court has found to be unfair in other cases include terms that:
- allowed for automatic renewal of the contract term – in certain cases for renewal periods of several years – unless the customer gave notice to cancel within a period before the end of the term, with no requirement to notify the customer of the upcoming auto-renewal;
- gave one party the right to unilaterally vary some or all of the charges payable by a customer, by notifying them of the change;
- put a significant cap on one party’s liability and excluded consequential loss, whereas the customer’s liability had no limit, and had to pay termination payments;
- allowed one party to suspend the services for a breach by the customer, but the customer had to pay for the suspended services.
Given that the Fowler and 1300 Australia cases occurred prior to when the Act comes into force, the consequences were less significant. Fowler gave a court-enforceable undertaking that the clause would not appear in future contracts. 1300 Australia refunded part of the termination fees paid by small business customers and undertook to amend current and future contracts. The outcome has been more severe in other cases, with remedies imposed by the court including orders to pay hundreds of thousands of dollars towards the ACCC’s costs, prohibition on using the terms, implementing a compliance program and publishing corrective notices. If the Fowler and 1300 Australia cases had happened after 10 November 2023, both companies could likely have been up for a large pecuniary penalty, in addition to the various orders a court could make.
What does this mean for you?
Reliance on unfair contract terms will no longer be resolved by voiding/amending a contract so that it is no longer unfair. ASIC and the ACCC now have an additional avenue to target and track down businesses for breaching the relevant legislation. Given the considerable budget and the zeal for the pursuit of wrongdoers these regulators have, we can anticipate that their powers will be flexed once they are able to be used.
Therefore, if you:
- Deal with consumers or small businesses (within the new definition above); and
- You deal with them on standard form contracts,
NOW is a great time to revisit those contracts and ensure that they do not contain any unfair terms. Ask yourself, “Does this term unfairly disadvantage the other side to the point that it is not necessary to protect our legitimate business interests?” If the answer is anything other than “No”, we strongly recommend reviewing your standard form consumer and business contracts to avoid facing the wrath of a regulator down the track. We have extensive experience in this field and would be glad to assist in eliminating unfair terms and finding a workable position that protects and suits your business.
If you would like further information on the above and how it impacts on you or your business, please contact one of our experts below. We have can provide tailored legal and practical advice to assist you with compliance with the ACL.