Important changes to the Australian Consumer Law: unfair contract terms

By Gabrielle Lindsay, Senior Associate

The future is here. From 9 November 2023, standard form contracts entered into with businesses that have fewer than 100 employees, or less than $10 million in revenue, will be illegal if they contain ‘Unfair Contract Terms’.

Breaches of the new laws will attract very large penalties, and both the ASIC and the ACCC have flagged that enforcement will be a priority. To find out if your business is affected, read on.

What is an unfair contract term?

The concept of unfair contract terms, found in in Part 2-3 of the Australian Consumer Law, (ACL), has been a part of our legislative landscape for over a decade.

Part 2-3 ACL applies to standard form contracts for the supply of goods or services, or a sale or grant of an interest in land, to either a consumer or a small business.

Broadly speaking, standard form contracts have been characterised as ‘take it or leave it’ contracts, where one party effectively says to the other, these are my terms and if you don’t like them, go elsewhere.

A term in a standard form contract is unfair if it:

  1. would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  2. is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  3. would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

November 2022 penalty increase

On 10 November 2022, the maximum pecuniary penalties for contravention of the ACL were substantially increased – $2.5M for individuals (up from $500K) and, for companies, the greater of:

  1. $50M (up from $10M);
  2. if the benefit derived from the contravention can be ascertained, 3x the value of that benefit; or
  3. if the benefit derived from the contravention cannot be ascertained, 30% of the business’s adjusted turnover during the breach turnover period (a minimum of 12 months).

From 9 November 2023, there is a new way to contravene the ACL and attract these severe pecuniary penalties – Unfair Contract Terms.

November 2023 changes – contraventions

Prior to 9 November 2023, it wasn’t illegal to include an unfair term in a contract, it just wouldn’t be effective (i.e., the term would be void). There were previously no pecuniary penalties associated with unfair contract terms.

Now, a person contravenes the ACL, and thereby potentially attracts a pecuniary penalty and compensation order, each time they:

  1.  enter into a standard form consumer or small business contract which contains an unfair term that they proposed, in which case, there will be a separate contravention for each unfair term, not each contract which contains one or more unfair terms; or
  2. apply, rely on, or purport to apply or rely on, an unfair contract term in a standard form consumer or small business contract.

November 2023 changes – small business contracts

From 9 November 2023, the meaning of a small business contract is significantly expanded – a contract is a small business contract pursuant to s23(4) ACL if at least one party to the contract employs fewer than 100 FTE people or has an annual turnover of less than $10M.

This change means that many more business will be affected by Part 2-3 ACL than ever before.

November 2023 changes – standard form contracts

The meaning of a standard form contract has been clarified (although arguably not modified) by 2 amendments to s27 ACL.

One item has been added to the list of things a court must consider when determining whether a contract is a standard form contract – that is, the volume of contracts in the same or substantially similar terms entered into by the party who prepared the contract.

Further, the section now specifically states that a contract may be a standard form contract despite the existence of any of the following opportunities:

  1.  to negotiate minor or insubstantial changes to the contract;
  2. to select a term from a range of options determined by another party; or
  3. for a party to another contract to negotiate the terms of their contract.

These amendments make it clearer to readers of the section that the crux of the issue is the existence of bargaining power – bargaining power that is real, genuine and effective, not illusory or nominal.

The amendments introduced on 9 November 2023 send a clear message to businesses that they must consider the commercial reality of their contracts, not just their form.

For advice about the new Unfair Contract Terms regime, contact Gabrielle Lindsay or Paul McWilliams.

Disclaimer: This document contains a summary of relevant information or an opinion which is current at the date of publication. This document is not intended to constitute legal advice and does not take into account individual facts and circumstances. The reader must not rely on this document as advice.

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