The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Amending Act) introduces a range of significant changes to the Competition and Consumer Act 2010 (Cth) (CCA) and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Headlining the changes are major updates to the unfair contract terms regime and substantial increases to the pecuniary penalties for breaches of the Australian Consumer Law (ACL), which is in Schedule 2 of the CCA. The changes are set to take effect on and from 9 November 2023 and will impact all consumer contracts and small business contracts entered, renewed, or amended on or after that date.
This article summarises the new unfair contract terms regime as amended under the ACL. While the majority of the changes introduced by the Amending Act are mirrored across the ACL and the ASIC Act, there are a few differences which change the operation of the regime under each Act. This article focuses on the ACL.
The unfair contract terms regime was initially introduced in 2016 with the aim of protecting small businesses from onerous and unjust contractual terms when dealing with counterparties that have greater bargaining power, typically larger businesses. The regime is set out fully in Part 2-3 of the ACL. Under the current regime, if a contractual term is found to be ‘unfair’, the term is simply voided with no further consequence. Practically, this places the onus on many small businesses and consumers to identify and litigate unfair contract terms against larger businesses which have no real deterrent against including and attempting to enforce such terms. The 2023 changes firmly shift this onus.
In broad terms, the new unfair contract terms regime achieves two purposes:
- provides businesses strong incentives to comply with the regime by introducing pecuniary penalties for the inclusion of unfair contract terms in consumer and small business contracts; and
- expands the number of small businesses which are afforded protection by amending various definitions and thresholds which determine whether the regime applies to a certain contract.
The new regime introduces a new offence for the inclusion of unfair contract terms in consumer contracts and small business contracts, pursuant to sections 23(2A)-(2C) inserted by the Amending Act. A business commits an offence if all the following cumulative criteria are satisfied:
- the business makes a contract; and
- the contract is a consumer contract or small business contract; and
- the contract is a standard form contract; and
- a term of the contract is unfair; and
- the business proposed the unfair term; or
- the business applies or relies on, or purports to apply or rely on, the unfair term.
What is a consumer contract?
The definition of a ‘consumer contract’ is unchanged between the old and new regime. Pursuant to section 23(3) of the ACL, a ‘consumer contract’ is a contract for:
- a supply of goods or services; or
- a sale or grant of an interest in land;
to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.
What is a small business contract?
The change in the definition of a ‘small business contract’ significantly expands the number of contracts captured by the new regime. The Amending Act repeals the old definition in its entirety and inserts sections 23(4)-(7) which sets out the various elements of the new definition.
A contract is a ‘small business contract’ if:
- the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
- at least one party to the contract satisfies either or both of the following conditions:
- the party makes the contract in the course of carrying on a business and at a time when the party employs fewer than 100 persons;
- the party’s turnover, calculated for the party’s last income year that ended at or before the time when the contract is made, is less than $10,000,000.
Section 23(5) provides detail on how to include casual and part-time employees in the calculation of employee numbers and section 23(6) specifies certain adjustments to be made in calculating a party’s turnover.
A summary of the key changes from the old regime are:
- the abolishment of the contract value threshold – the new regime will apply to all contracts that fit the definition, regardless of the value of the contract.
- an increase in the employee threshold from 20 employees under the old regime to 100 employees in the new regime.
What is a standard form contract?
Whether a contract is a standard form contract is a largely factual inquiry to be conducted by the Court. The new regime does not substantially change the old regime other than to add to the existing list of factors under section 27 that a Court must consider when determining whether a contract is a standard form contract. Examples of the factors considered include:
- whether one of the parties has all or most of the bargaining power relating to the transaction;
- whether one of the parties has made another contract, in the same or substantially similar terms, prepared by that party, and, if so, how many such contracts that party has made (new addition);
- whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented.
The Amending Act also inserts a new section 27(3) which clarifies that minor negotiations will not prevent a contract from being classified as a standard form contract. More specifically, a contract may be a standard form contract despite there being an opportunity for:
- a party to negotiate changes, to terms of the contract, that are minor or insubstantial in effect;
- a party to select a term from a range of options determined by another party;
- a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.
When is a term unfair?
The cumulative criterion established by the ACL to determine whether a term is ‘unfair’ is unchanged between the old and new regime. Pursuant to section 24, a term is ‘unfair’ if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Some of the examples of the kind of terms that may be unfair are listed in section 25 of the ACL and include:
- a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
- a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract; and
- a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract.
Our article ‘Examples of Unfair Contract Terms under the Former Unfair Contract Terms Regime applying pre-9 November 2023‘ explores recent cases on unfair contract terms across 5 broad categories. Our previous articles which have also explored unfair contract terms under the former regime include: ‘Ashley & Martin – Unfair contract terms in consumer contracts’ and Cami and iTutor home tutoring software services – Unfair Contract Terms.
Under the current regime, if a term is found to be unfair, the term is simply voided and rendered unenforceable. With the introduction of offences under sections 23(2A) and (2C) for proposing or including an unfair term in a contract, a breach will now attract pecuniary penalties as set out in section 224.
For corporations, the maximum pecuniary penalty which can be imposed for a breach of sections 23(2A) or (2C) is the greater of:
- if the court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, have obtained directly or indirectly and that is reasonably attributable to the act or omission—3 times the value of that benefit; and
- if the court cannot determine the value of that benefit—30% of the body corporate’s adjusted turnover during the breach turnover period for the act or omission.
Adjusted turnover means the sum of the values of all the supplies that the body corporate, and any body corporate related to the body corporate, have made, or are likely to make, during the period, subject to certain adjustments set out in the statutory definition of adjusted turnover.
Breach turnover period means the longer of the following periods:
- the period of 12 months ending at the end of the month in which:
- for an offence—the body corporate ceased committing the offence, or was charged with the offence (whichever is earlier); or
- for an act or omission—the act or omission ceased, or proceedings in relation to the act or omission were instituted (whichever is earlier);
- the period ending at the same time as the period determined above and starting:
- for an offence—at the beginning of the month in which the body corporate committed, or began committing, the offence (as the case requires); or
- for an act or omission—at the beginning of the month in which the act or omission occurred or began occurring (as the case requires).
For individuals, the maximum pecuniary penalty which can be imposed is $2,500,000.
What this means for your business?
The new regime commenced on 9 November 2023. If your business has not already undertaken a review of its standard form contracts for compliance with the new regime, it is critical that businesses review their contracts and ensure that they are compliant with the new regime.
Further, the introduction of pecuniary penalties for implementing or relying on unfair contract terms coincides with a five-fold increase in the minimum penalties for corporations in breach of the ACL. Accordingly, it is in the best interest of businesses to act promptly and seek legal advice prior to creating or amending any business or consumer contracts.
Please contact us today if you need assistance in having your contracts reviewed.
This information is for information purposes only and is not legal advice. You should obtain advice that is specific to your circumstances and not rly on this publication as legal advice. Please contact us if you wish for us to advise you on any issue you may have arising from this publication.