Widening The Net – Significant Changes To The Scope Of Unfair Contract Terms Under The ACL
New legislation set to come into effect later this year will see the scope of the unfair contract term provisions under the Australian Consumer Law significantly widened. These changes will also strengthen the current provisions and impose a number of new penalties. In this article, our commercial law team explores the current unfair contract term regime, the upcoming changes and what this will mean for consumers and businesses.
The Australian Consumer Law (‘ACL’) regulates fair trading in Australia by setting out the rights of consumers and the obligations of those who supply goods and services. Amongst a number of other things, the ACL prohibits the use of unfair contract terms. Under the ACL, a term will be ‘unfair’ if it:
- Would cause a significant imbalance to the rights and obligations of the parties;
- Is not reasonably necessary to protect the legitimate interests of the party advantaged by it; and
- Would cause or lead to detriment (financial or otherwise) to a party if relied upon.
Examples of such terms may include terms that enable one party (but not the other) to limit their obligations under the contract, terms that allow one party (but not the other) to terminate the contract, or terms that impose disproportionate termination rights or penalties. Recent case law has also shown that broadly drafted clauses which allow a party to increase the price of a contract without reference to any specific formula or method of calculating the increase may be unfair and deemed void under the ACL. This was highlighted by the recent Queensland case of Perera v Bold Properties.
CURRENT APPLICATION OF UNFAIR CONTRACT TERM (‘UCT’) PROVISIONS
It is important to note that the prohibition and protection against unfair contract terms only applies in limited circumstances. Currently, to receive the benefit of the UCT provisions included in the ACL, it must be shown that:
1. A person or business entered into a ‘consumer contract’ or a ‘small business contract’ (respectively);
(a) Consumer contracts being a contract:
- for the supply of goods or services to an individual for predominantly personal, household or domestic use or consumption; or
- for the sale or grant of an interest in land to an individual whose acquisition is predominantly for personal, household or domestic use;
(b) Small business contracts being a contract:
- For the supply of goods or services;
- Where one party is a business with less than 20 employees; and
- For less than $300,000 or $1 million if greater than 12 months;
2. The consumer or small business contract is a ‘standard form contract’ (i.e. offered on a take it or leave it basis); and
3. The contract term in question is ‘unfair’ within the meaning of the ACL.
For the UCT provisions to apply, the above requirements must all be satisfied. Meaning that even if a term contained within a contract is unfair, it will not be dealt with under the ACL unless the contract is also a consumer or small business contract and a standard form. As a result, many consumers and small businesses have been left without recourse simply because they do not meet the strict criteria under the ACL – which has remained unchanged since 2010.
NEW REGIME AND CHANGES TO THE ACL
Under the recently introduced Treasury Laws Amendment (More Competition Better Prices) Act 2022 (‘the Act’), the UCT provisions of the ACL have been significantly strengthened and expanded upon. A summary of the key changes under the Act is as follows:
Under the Act, the definition of a ‘small business contract’ has been updated so that a small business will now include a business:
- with fewer than 100 employees (previously 20 employees); or
- which had an annual turnover of less than $10 million for the previous financial year.
This new definition has also seen the removal of the monetary threshold on the value of a contract.
Standard Form Contracts
The definition of ‘standard form contract’ has been revised to provide greater certainty about what constitutes a standard form contract. The new wording states that a contract may still be considered a standard form contract despite the existence of the following:
- an opportunity to negotiate changes to the terms of a contract that are minor or insubstantial;
- an opportunity to select a term from a range of options pre-determined by another party;
- an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.
In addition to extending the application of the UCT provisions, penalties for non-compliance have also been bolstered with increased maximum financial penalties introduced and new offences established.
Where a company is in contravention of the UCT provisions, the maximum penalty (formerly $10 million) will now be the greater of the following:
- $50 million;
- three times the value ‘reasonably attributable’ to the benefit obtained from the breach; or
- 30% of the company’s adjusted turnover during the period it was in breach.
Conversely, where an individual is in breach of the UCT provisions, the new maximum financial penalty will be $2.5 million (previously $500,000).
The Act also makes it an offence to ‘enter into’ or ‘rely on’ or ‘seek to rely on’ an unfair contract term in a standard form consumer or small business contract, and the courts will have further powers to address breaches of the ACL.
IMPACTS AND STEPS TO MINIMISE RISK
The changes introduced by the Act have been long awaited. They will act as both a deterrent against using and relying on unfair contract terms while also providing greater protection to consumers and small businesses. The extended application and scope of the UCT provisions will mean that many small businesses and consumers who were previously unable to rely on the ACL will now be afforded the protection of the updated UCT provisions.
Businesses will need to review their current standard form contracts, in consideration of the new UCT provisions, to ensure compliance before the increased penalties come into effect on 8 November 2023. Similarly, consumers should take the time to review their contract before signing to ensure the terms of the contract are reasonable.
RAMSDEN LAWYERS – HOW WE CAN HELP
As outlined above, businesses must take a proactive approach in assessing and revisiting their standard form contracts. While whether a term is unfair will ultimately depend on the circumstances, we recommend that contracts are reviewed by a legal professional prior to signing to minimise and mitigate the risk of being in contravention of the UCT provisions of the ACL.
If you are seeking legal advice or assistance with your standard form contract or need legal advice, Ramsden Lawyers can assist you. We are happy to arrange an obligation-free initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances.
The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice. Specific advice should be sought about your circumstances.