Are you ready for the unfair contract terms reforms?

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By Stephen Putnins, Partner, Geoffrey McCarthy, Special Counsel, and Amiinah Dulull, Lawyer

New provisions and penalties for unfair contract terms under amendments made by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth.) (Amending Act) come into operation from 9 November 2023. Schedule 2 of the Amending Act strengthens protections for consumers and small businesses against unfair contract terms (UCTs). The reforms will not apply to existing contracts; however, variations or renewals of these existing contracts, after the date of commencement, will be captured.

Fast facts – what you need to know

  • The UCT amendments: The Amending Act amends the Competition and Consumer Act 2010 (CCA), the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (ASIC Act). The amendments introduce new prohibitions, strengthen the remedies and enforcement of the regime, expand the class of contracts that are covered by the UCT provisions, and clarify and strengthen the UCT provisions generally.
  • Proposing unfair terms is unlawful and subject to civil penalty: Each unfair term in a standard form contract with a consumer or small business is a separate contravention.  Applying or relying on a UCT is also a contravention.  Civil penalties will be up to $15.65 million per contravention for a body corporate and $1.565 million for an individual under the ASIC Act or potentially more depending on the gain obtained or loss avoided or measures of annual turnover.
  • Small Business definitions have changed and broadened: A company that employs up to 100 people may be covered.
  • Financial services licensees: A breach of the prohibitions under the UCT provision may now trigger breach reporting obligations to ASIC.

Your next steps – What you need to do now

At this stage, your business should have started preparing for the UCT amendments to avoid delays later on when proposing standard form contracts. Your business should ensure that:

  • all of your existing standard form contracts have been reviewed for potential UCTs;
  • all of your contractual parties have been assessed to determine who may fall within the new definition of ‘small business’; and
  • there are adequate controls, policies, and employees’ training in place to ensure compliance with the UCT amendments.

The need to be prepared is crucial because stakes have been raised now. Currently, a UCT in a standard form contract will only be void and unenforceable. Under the UCT amendments, this UCT will be a breach of the prohibition, therefore, exposing your business to significantly increased penalties. The amendments also give rise to heightened risk from a counterparty threatening litigation.

Financial services licensees should also keep in mind that a breach of the new prohibition may trigger your breach reporting obligations to ASIC. In light of ASIC’s strengthened sense of commitment to consumer protection, we are aware of ASIC action in this area and we do expect ASIC to take an interest in, and possibly take enforcement actions against, potential breaches of the new prohibitions.

Context of the amendments

The new changes were introduced as standard form contracts are often offered on a ‘take it or leave it’ basis and are mostly unfavourable to consumers and small businesses because of their lack of resources and bargaining power. The Trade Practices Act 1974 first introduced the protections against the unfair terms which were then extended in the ACL. This regime was further extended by the Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2019.

Scope of the amendments

Financial product and financial services

The ACL provisions will capture UCTs in contracts for goods, services and the sale or grant of an interest in land. The equivalent ASIC Act provisions address UCTs in contracts for financial products and broadly defined financial services, including credit contracts and services related to financial products. These provisions are relevant to contracts with suppliers, agents or representatives  providing financial products, financial services or services relating to financial products.

Expansion of the ‘small business’ definition

The Amending Act expands the class of contracts that are covered by the UCT provisions by increasing the ‘small business’ definition thresholds and removing the contract value threshold for contracts under the ACL and raising the value threshold for contracts regulated by the ASIC Act.

Under the ACL, the scope of the UCT regime has been significantly expanded to include small business contracts where one party to the contract is a business that:

  • Employs fewer than 100 employees (increased from 20 employees); or
  • Has a turnover of less than $10 million, removing the upfront contract value threshold .

Under the ASIC Act, the protections will apply to a small business contract if:

  • The contract value threshold does not exceed $5 million; and
  • One party to the contract employs less than 100 employees or has a turnover of less than $10 million.
Clarification of a ‘standard form contract’

For both consumer and small business contracts, the UCT reforms clarify what constitutes a ‘standard form contract’ under the ACL’s UCT regime. For example, courts must take into account whether a party has entered into another contract prepared on substantially similar terms, and how many contracts that party has entered into. It also clarifies that a contract may still be ‘standard form’ even where there is an opportunity for a party to:

  • negotiate changes to terms of the contract that are minor or insubstantial in effect;
  • select a term from a range of options determined by another party; or
  • negotiate terms of another contract or proposed contract.

The constitution of a company or a managed investment scheme is excluded by the terms of the legislation.

The amendments

New prohibition – Prohibiting the use, application of or reliance on a UCT

This amendment provides for two separate prohibitions:

  • it makes it clear that a person will be in breach of the law if they propose an unfair term in a standard form consumer or small business contract which they have entered into; and
  • secondly, it makes it clear that a person will be in breach of the law if they propose, apply or rely (or purport to apply or rely on) an unfair term of a standard form consumer or small business contract.
Broader remedies available

The Amending Act retains the current automatic voiding provisions but will broaden the court’s powers to respond to breaches of the UCT regime.

Increased maximum civil penalties for ACCC actions

For corporations who contravene the Competition and Consumer Act 2010 and the Australian Consumer Law,  the maximum civil penalty will be the greatest of:

  • $50 million (increased from $10 million);
  • if the court can determine the value of the benefit obtained – three times the value of that benefit (no change); and
  • if the court cannot determine the value of the benefit obtained – 30% of the corporation’s “adjusted turnover” during the “breach turnover period” for the act or omission (increased from 10% of the body corporate’s annual turnover in the 12 months prior to the act or omission).

For individuals, the reforms increase the maximum civil penalties from $500,000 to $2.5 million.

Case law on UCTs

There is a large body of case law on UCTs and whilst most UCT cases relate to the ACCC enforcement actions, these cases are equally applicable to the UCTs in contracts subject to the identical UCT provisions in the ASIC Act.

One of the most recent judgements on UCTs is the Federal Court in ACCC v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 (Fujifilm). The ACCC brought proceedings against Fujifilm alleging 38 terms used by Fujifilm in several of its standard-form small business contracts, were ‘unfair’ and therefore unlawful. This case serves as a very useful example illustrating contractual terms that could be UCTs. The Federal Court ordered Fujifilm to stop enforcing the UCTs and restrained it from relying on similar terms in future. Under the current UCT Regime, Fujifilm was also required to publish notices on its website explaining that the terms were declared void and unenforceable, implement a compliance program for employees involved in drafting, negotiating, and enforcing contracts, and pay $250,000 towards the ACCC’s costs.

We note that if Fujifilm was prosecuted after 9 November 2023 for the same conduct, it could have faced maximum penalties of up to $50 million for each unfair term, i.e., a maximum theoretical penalty of $1.9 billion.

The UCTs included:

  • automatic renewal terms;
  • unilateral variation of fees, and rights and obligations between Fujifilm and the customer;
  • unfair payment terms where a customer had to pay Fujifilm regardless of whether Fujifilm has delivered the services;
  • incorporation of supplementary information that was difficult to locate; and
  • significant caps, reductions or limitations on Fujifilm’s total liability to the customer and exclusion of consequential loss in circumstances where the customer’s liability had no limit.

Get in touch with us

Several types of contracts could now be captured under the UCT amendments. Be it a superannuation trust deed or a contract for the provision of advice. It also leads to the thought that smart contracts could potentially be captured as well (although there are several issues to consider because of the nature of smart contracts).

The current UCT regime exempts certain types of terms from being unfair and the UCT amendments have now expanded this.

Whether or not the UCT amendments will apply to your standard form contracts will depend on several factors. We are well-equipped to assist you with your needs to ensure compliance from 9 November 2023.

For further information, please do not hesitate to contact us.

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    Financial Services

    RegTracker 14 February 2022