Huge fines loom for unfair business contracts
In the words of the ACCC, when changes to the laws were passed in 2022: “Standard form contracts provide a cost-effective way for many businesses to contract with significant volumes of customers, however, by definition, these contracts are largely imposed on a ‘take it or leave it’ basis. The unfair contract terms laws are vital to protect consumers and small businesses against terms in these contracts that take advantage of this imbalance in bargaining power.”
More than six years ago, unfair contract terms protections in the ACL and Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’) were first extended to small businesses. In November, further and significant changes will take effect, impacting businesses whose standard form contracts with consumers and small businesses are found to include unfair terms.
What is the ‘unfair contract terms’ regime?
The term ‘unfair contract terms (UCT) regime’ broadly describes laws that deal with unfair terms in contracts. The UCT regime currently provides that, where a court finds a term is ‘unfair’ in certain standard form consumer contracts or small business contracts, the term is void.
From 10 November 2023, changes to the UCT regime come into effect which substantially expand the scope of the UCT regime and introduce greater financial penalties for non-compliance.
What is a ‘standard form contract’?
A standard form contract is generally understood as a set of standard terms and conditions that is issued on a repetitive basis to multiple people, for example a gym membership application form or the terms and conditions governing an electricity service. It is an agreement where one party has prepared the contract and the other party has little to zero input regarding the terms of the contract.
When there is a dispute, the court will determine whether a contract is a ‘standard form contract’ on a case-by-case basis. In making its decision it will take into consideration:
- whether one party has all or most of the bargaining power relating to the transaction
- whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties
- whether another party was required either to accept or reject the terms of the contract in the form in which they were presented
- whether another party was given an effective opportunity to negotiate the terms of the contract, and
- whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.
The changes to the UCT regime will clarify and broaden the existing definition of a standard form contract.
What is an ‘unfair’ contract term?
A term in an applicable standard form contract is unfair if it:
- causes a significant imbalance in the parties’ rights and obligations under the contract
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by such a term, and
- would cause detriment (financial or otherwise) to a party if the term were to be applied or relied upon.
To whom does the UCT regime apply?
The (current and new) UCT regime applies to all businesses that use standard form contracts in dealings with consumers and small businesses to:
- supply goods or services
- sell or lease land, or
- supply financial services or financial products.
The new UCT regime will apply to a significantly expanded class of ‘small business’.
To what contracts does the regime apply?
The UCT regime applies to all standard form contracts with consumers and small businesses which were entered into, renewed or varied after 12 November 2016.
What are the key changes coming into effect?
Critical changes to the UCT regime coming into effect on 10 November 2023 include:
- Broadening the class of contracts covered in the UCT regime by:
– Expanding the definition of a ‘small business’. A small business is one that employs fewer than 100 people (previously 20) or has an annual turnover of less than $10M.
– Expanding the definition of ‘standard form contract’. In determining whether a contract is a ‘standard form contract’, a Court is now required to consider whether a party has used the same or a similar contract before, and the number of times this has been done. In addition, a contract is a standard form contract despite whether a party has had an opportunity:
> to negotiate changes that are minor or insubstantial in effect;
> to select a term from a range of options; or
> for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.
– Removing the contract value threshold for contracts under the ACL and raising the value threshold for contracts regulated by the ASIC Act (from $1M to $5M). - Prohibiting unfair contract terms
Under the current UCT regime a court can only determine an unfair term in a standard form contract is void and therefore unenforceable. Under the new UCT regime it will be prohibited to propose or make a contract with and/or apply, rely or purport to apply or rely on an UCT in a standard form consumer or small business contract. - Introducing civil penalty provisions for breaches
Under the current UCT regime, the court is limited to ordering that an UCT is void. Under the new UCT regime, the court will have additional powers including the ability to declare the whole or any part of the contract void, to vary the contract as the court sees fit, and to impose pecuniary penalties:
– for a body corporate, whichever is the greater of $50 million (up from $10M), or three times the value of the benefit (if the court can determine the value of the benefit obtained), or 30% (up from 10%) of the adjusted turnover during the breach turnover period (if the court can’t determine the value of the benefit), and
– up to $2.5 million for an individual (up from $500,000).
The new regime will apply to standard form contracts entered into or renewed following 10 November 2023, and to terms of standard contracts varied after this date.
What are some examples of terms that could be unfair?
1. Automatic renewal terms
- Terms that automatically rollover the contract without notice
- Unilateral rights for one party to extend a contract an unlimited number of times
- Free product trials that roll into paid subscriptions without notice
2. Imbalanced termination rights
- Unilateral rights to immediately suspend performance of a contract for any reason without notice
- Unilateral termination for convenience rights
- Excessive early termination charges or other “exit fees”
3. Unilateral limitation of liability or indemnity terms
- Very low liability caps (e.g. limiting liability to fees paid where minimal fees paid upfront)
- One-way indemnity for risks outside the indemnifying party’s control
- One-way indemnity for breach of contract
4. Unilateral variation terms
- Right to unilaterally vary product description
- Right to unilaterally vary service levels
- Right to update terms published on a website without notice
5. Unfair payment terms
- Right to unilaterally vary fees
- Requirement for pre-payment, no ability to get a refund for unused services/products
- Charges payable without performance by the supplier
What are the implications of the changes?
From 10 November 2023, unfair contract terms will be illegal and can attract substantial penalties. A person/business will be in breach of the UCT laws if they include an unfair term in a standard form consumer or small business contract entered into with a consumer or small business. It should be noted that each individual unfair term within a contract will be considered a separate breach. This could result in a court finding multiple breaches in a single contract.
There is no defence for companies that mistakenly characterise a counterparty as being outside the UCT regime – companies need to ensure compliance processes properly capture small business counterparties, which will depend on those counterparties’ employee count or revenue.
The new maximum civil penalty for breaches of the UTC regime includes consideration of a penalty figure constituting 30% of a business’ turnover during the offence period, as opposed to just 12 months prior. This could potentially result in significant financial penalties for companies if an unfair contract term was in effect for a long period of time.
In essence, the broader scope of the new UCT regime will capture more standard form contracts and the introduction of civil penalties for contravening the prohibitions on UCT means businesses will face a considerably greater risk by using standard form contracts.
Law firms have warned that the ACCC and ASIC are prioritising enforcement of UCTs and are expected to seek penalties for their use after the reforms commence.
How should you prepare for the new UCT regime?
Ahead of the changes coming into effect, businesses should review their standard form contracts and ensure compliance with the new requirements. Likewise, consumers and small businesses should familiarise themselves with their rights and remain vigilant against any potentially unfair contract terms.
If you rely on standard terms and conditions in your dealings with customers who fall within the expanded definition of a ‘small business’ you should:
- recognise that the UCT regime has been significantly broadened and many additional customers will fall within its scope
- understand the risks have changed in so far as the court can order the entire contract to be void (rather than just the unfair contract term itself) and significant penalties can be awarded
- seek appropriate legal advice to determine whether any amendments or updates to your standard form contracts are required
- work with your lawyers to remove, modify or clarify any potentially unfair terms, and
- communicate openly and honestly with customers to ensure the terms and conditions are properly incorporated and brought to their attention before goods or services are provided.=
It is also important to talk with your EBM Account Manager about whether your applicable insurance policies will provide cover in the event of a civil penalty being awarded against you for breach of the unfair contract terms provisions in the ACL.
