It’s been one month since significant changes to the unfair contract terms (UCT) regime came into effect, which made UCTs illegal and subject to significant penalties and vastly expanded the types of small business contracts that are now subject to the UCT regime. In this short update we cover:
- the three new contravention provisions and what they mean;
- practical issues arising from these changes; and
- what to expect from the ACCC next.
See also our team’s update on the High Court of Australia’s recent decision on the intersection of the unfair contracts regime and the choice of law: 'High Court rules on intersection of unfair contract terms regime and choice of law'.
Understanding the UCT Regime: what’s the $50 million question again?
The UCT regime now prohibits unfair terms in standard form contracts with consumers or small businesses that:
- cause a significant imbalance in the rights and obligations of the parties;
- are not reasonably necessary to protect the legitimate interests of the party benefiting from the term; and
- would cause detriment to a party if relied on.
In addition to prohibiting UCTs and imposing penalties, the latest changes to the UCT regime have significantly broadened the definition of a small business contract, extending the application of the UCT regime to contracts with businesses of <100 employees OR turnover of <$10 million. (To read up on the full list of changes, see our previous article 'Unfair contract terms: it’s time to get your house in order').
The maximum penalty per contravention for corporations is the greater of:
- $50 million;
- if the Court can determine the benefit obtained that is "reasonably attributable" to the conduct, 3 times that value; or
- if the Court cannot determine the benefit, 30% of the corporation's adjusted turnover during the breach turnover period.
UCTs in consumer and small business contracts are a compliance and enforcement priority for the ACCC for 2023-24, and with the changes now in place, we can expect to see the ACCC start taking enforcement action against offenders very soon (some even say we may see an action before the end of this year).
But how exactly does a business contravene the new prohibitions? And who is most likely to be in the ACCC’s firing line? We explore these questions below.
Three separate contravention provisions
Under the new laws, there are three key contravention provisions:
- Entering into a standard form contract with a consumer or small business that contains an unfair term, and where you are the party that proposed the term.
It is therefore illegal simply to include a UCT in a standard form contract with a consumer or small business, regardless of whether you decide to enforce the term against the other party. All that the law requires is that you proposed the term and it made it into the contract.
- Separate contraventions for each unfair term that they proposed.
if a person proposes six different contract terms that are all found to be unfair, they could be found to have contravened the ACL at least six separate times. That is, there can be multiple contraventions within a single contract.
- Applying or relying on, or purporting to apply or rely on, an unfair contract term in a relevant contract.
To apply or rely on means to seek to enforce, or to give effect to, an unfair contract term.
To be clear, a person can engage in multiple contraventions:
- within one contract;
- in relation to one term applied multiple times; and
- in relation to multiple terms applied once.
Practical issues of the expanded UCT regime
We set out below several interesting legal and practical issues that arise in relation to the expanded regime. You might find yourself facing these issues, including:
- What happens when existing contracts are renewed?
- What happens if the business wasn’t a ‘small business’ before, but now would be under the new thresholds?
- What steps can businesses take to ensure meaningful and effective negotiation to avoid the risk of contracts being standard form?
- How do businesses know whether the other party is a small business in accordance with the new definition?
- What does it actually mean to prove that terms are reasonably necessary?
- What reaches the threshold of causing ‘detriment’ to a counterparty?
- What if the relevant terms are intended to cover a range of counterparties of which small businesses are only portion?
- How do I communicate with counterparties and effectively address complaints or concerns?
What’s next for ACCC enforcement on unfair contract terms?
The ACCC has long been an advocate for strengthening protections against unfair contract terms and earlier this year stated it was undertaking a “proactive review” of business terms and conditions across various sectors as a basis “for future enforcement cases”.
Given unfair contract terms are a compliance and enforcement priority for 2023-24, we expect the ACCC will announce enforcement action very soon.
As ACCC Chair Gina Cass-Gottlieb earlier this year stated:
“[I]t is no surprise that we will be prioritising compliance with these requirements. For too long, in our view, many businesses have failed to take the unfair contract provisions seriously. Now that unfair contract terms attract penalties, we expect to see businesses complying with their obligations, and will consider enforcement where appropriate.”
The ACCC has not (at least yet) identified particular industries it is looking at, although has noted that it will work to ensure that consumers and small businesses, including franchisees, enjoy the full benefit of strengthened UCT laws. Further, ACCC Deputy Chair, Mick Keogh, noted the ACCC would be ready to act against companies if there were complaints from the public. Businesses (including franchisors) should therefore ensure the standard form contracts they use with consumers and small businesses are UCT-compliant as soon as possible, if they haven’t yet already.
Prior to the changes coming in, the ACCC announced on 21 August 2023 that it had concluded its unfair contract terms investigation into standard form contracts for fertiliser suppliers. “Some” of the potential UCTs the ACCC identified related to:
- the right to unilaterally vary the quantity to be delivered or to terminate if there was a belief goods could not be supplied; and
- restrictions on rights to raise issues about defects with the goods.
We will continue to monitor this area closely and provide updates on developments in the enforcement of the new UCT laws.