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New penalties for Unfair Contract Terms call for an immediate review of your Standard Form Contracts

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Alison Rees Senior Associate Linkedin
Unfair Contract Terms Laws - UCT Laws

 

On 9 November 2023, a substantial expansion of the unfair contract terms laws (the UCT laws) in the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) will come into effect.

Before that date, you should:

  1. determine whether any of your contracts will become subject to the UCT laws; and
  2. if they are, review and, if necessary, update those contracts so that they do not contain unfair contract terms, as defined by the UCT laws.

The UCT laws in the ASIC Act apply to people providing and receiving financial products and services, whereas the UCT laws in the ACL apply to people providing and receiving any other type of product or service.  In substance, the UCT laws in both Acts are the same, although there are a number of differences in detail.

The expanded regime will apply to standard form contracts entered into, renewed, or varied from 10 November 2023.

Penalties to apply from 9 November 2023

Currently, the UCT laws simply deem an unfair contract term in a standard form consumer or small business contract to be void.  As a result, the only remedy against the inclusion of an unfair contract term in a standard form contract is to seek a declaration from a court that an unfair contract term is void.

From 9 November 2023, the UCT laws will prohibit a person from proposing, using, applying, or relying on, an unfair term in a standard form consumer or small business contract to which they are a party.  The remedies available in relation to a contravention of these prohibitions will be substantially expanded.

Those remedies include that a court can order a civil pecuniary penalty and issue injunctions if a person contravenes the UCT laws.  The court can also make orders which apply to any existing consumer or small business standard form contract 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 – whether or not that contract is put before the court.

The maximum penalty that can be ordered for contravention of the new UCT laws differ depending on whether the UCT laws in the ASIC Act or the ACL apply.

Under the ASIC Act, for an individual, the maximum penalty, from 9 November 2023, will be the greater of:

  • 5,000 penalty units ($1,565,000); or
  • if the court can determine the amount of the benefit derived and detriment avoided because of the contravention, that amount multiplied by 3.

For a body corporate, the maximum penalty under the ASIC Act will be the greatest of:

  • 50,000 penalty units ($15,650,000);
  • the amount of the benefit derived and detriment avoided because of the contravention multiplied by 3; or
  • 10% of the annual turnover of the body corporate for the 12-month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision, but limited to 2,500,000 penalty units ($555,000.000).

Under the ACL, the maximum penalty for an individual will be $2,500,000.

For a body corporate, the maximum penalty under the ACL will be the greatest of:

  • $50,000,000;
  • three times the value of the “reasonably attributable” benefit obtained from the conduct, if the court can determine this; or
  • if a court cannot determine the benefit, 30 per cent of adjusted turnover during the breach period.

Each individual unfair term contained in a contract proposed by the person is considered a separate contravention and, as a result, a person can be found to have multiple contraventions in a single contract.

Expanded application of the UCT laws

Small businesses

From 9 November, the definition of “small business” in the UCT laws will also be expanded.

The result is that the UCT laws in the ASIC Act will apply to small business standard form contracts where the upfront price payable does not exceed $5,000,000 and one party to the contract employs fewer than 100 persons or has a turnover for the last income year of less than $10,000,000.

The UCT laws in the ACL will apply to small business standard form contracts where at least one party to the agreement either employs fewer than 100 persons or has a turnover in the income year prior to when the contract was made which is less than $10,000,000: unlike the ASIC Act, there will not be any “upfront price” threshold.

Individuals

As for individuals, the UCT laws in both the ASIC Act and the ACL will continue to apply to all standard form contracts with “consumers” – that is, an individual who is acquiring a financial product or service (in the case of the ASIC Act) or a product or service (in the case of the ACL) under the contract wholly or predominantly for personal, domestic or household use or consumption.

Standard form contracts

The definition of a “standard form contract” will also be broader.  From 9 November, a contract may still be a standard form contract, despite there being an opportunity to negotiate minor or insubstantial changes to that contract.  When considering whether a contract is standard form, you will also need to consider whether there is “repeated usage of a contract”.  In other words, whether contracts with your customers have the same or similar terms that are repeated across different customers.

“Contracts” will include your terms and conditions, privacy and other policies, and any other terms on which a person or small business might engage with your business to acquire or provide goods or services.

What constitutes an “unfair” contract term?

The laws regarding what constitutes an “unfair” contract term will not change.  To recap, a term of a standard form contract will be “unfair” if:

  • it would cause a significant imbalance in the parties’ rights and obligations under the contract;
  • it is not reasonably necessary to protect legitimate business interests; and
  • it would cause detriment (financial or otherwise) if it were to be applied or relied upon.

In deciding whether a term is unfair, a court must also consider the extent to which the term is transparent and the contract as a whole.  The court may also consider any other matter the court considers relevant.

Both the ACL and the ASIC Act set out a list of examples of clauses that may be unfair.  These examples serve as a useful starting point to “pinpoint” clauses in your standard form contracts that might be unfair.  However, these examples are not an exhaustive list of clauses that might be unfair.  Ultimately, you must refer to the three criteria listed above to determine whether a clause of a standard form contract is “unfair”.  That also means that a clause may fall within one of the listed examples but nevertheless be deemed not to be “unfair”.  This might be case where, for example, you are able to establish that the clause is reasonably necessary to protect legitimate business interests.  Equally, a term of a standard form contract may be unfair notwithstanding that it does not fall into one of the categories of examples set out in the legislation.

There have also been a number of court decisions in relation to whether particular clauses were unfair.

Businesses are currently in the grace period to “get their house in order”

The current UCT laws which deem unfair contract terms to be void have been in place since 2010 and have broadened in scope over successive years.  Given that, and because the new UCT laws do not change what constitutes an “unfair contract term”, we expect that ASIC and the ACCC will be proactive in exercising their rights to seek penalties for contraventions of the UCT laws from 9 November 2023 and will not give businesses further grace periods to “get their house in order”.

Businesses should review their standard form contracts now, in readiness for these changes.

TIP 1: Review your contracts including all your terms and conditions and policies to first determine whether they are likely to be “standard form contracts”, and for those which are, identify and replace any terms which are unfair.  Contact our commercial law team to assist with this task.  An Unfair Contract Terms Information Sheet is also available on the HN Hub to assist.

TIP 2: Attend our Topical Webinar on Unfair Contract Terms, where we’ll discuss the upcoming changes, and what you can do to be ready.

Author: Alison Rees (Senior Associate)