What are the unfair contract laws?

Since 2010, there have been federal laws to combat unfair terms in standard form consumer contracts – commonly called the unfair contract terms (UCT) regime.   Depending on the type of contract, unfair terms are prohibited under the Australian Consumer Law and also the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”).

A consumer contract is a contract for the supply of goods or services to an individual who acquires the goods or services wholly or predominantly for personal, domestic or household use or consumption.  It also applies to contracts for the sale or lease of land, and the supply of financial services or financial products.

The UCT regime also extends to standard form contracts with small business customers, depending on the size of the business and, until these changes come into effect, the value of the contract.

A contract term could be ‘unfair’ if:

1. It would cause a significant imbalance in the rights and obligations of the parties to the contract;
2. It is not reasonably necessary to protect the interests of the party who would be advantaged by the contract term; and
3. When the term is relied on, it would be detrimental to the other party to the contract

If a contract contains an unfair, the Courts have had the power to void the unfair term and order that it no longer apply (while the rest of the contract will continue, usually). Further, if a business tries to enforce an unfair contract term, it could be committing misleading and deceptive conduct and penalties could be imposed.

Some examples of contract terms that could potentially be considered ‘unfair’ include (but are not limited to):

1. Allowing one party to avoid meeting their obligations
2. Preventing the customer from having the right to terminate the contract
3. Allowing one party to change the terms of the contract, but not the other party
4. Allowing one party to renew the contract, but not the other party
5. Imposing penalties if one party breaches the contract, but not the other party.

What are the changes?

In short, the UCT regime will apply to a wider range of contracts that are entered into from 10 November 2023.  Further, there will be new penalties for breaching the unfair contract laws. The changes will also apply to existing contracts that are renewed or varied from 10 November 2023.  

The key changes include:

1.  A new civil penalty regime that will apply to businesses who use and rely on unfair contract terms.  For companies, the maximum penalty will increase to the greater of $50 million (previously $10 million), or three times the value of the benefit of the clause to the company, or 30% of the company’s turnover during the period when it was using the unfair term (previously 10% of turnover and only during the 12 months prior to the breach).  For individuals, the maximum penalty is $2.5 million (previously $500,000.00).
2. Expanded protections to small businesses that are customers in a standard form contract. The UCT regime will apply if one of the parties to the contract is a small business that employees less than 100 people (previously 20 people) or has a turnover for the last income year of less than $10 million. There is no longer a requirement to assess the value of the contract, except if it is a type of contract that is covered by the ASIC Act – in which case the value of the contract must be less than $5million (previously $3 million).
3. Clarification about the role and powers of the Courts when dealing with unfair contract claims. The Courts will be able to void, vary or refuse to enforce an unfair contract term. Further, the Courts will be able to grant injunctions to stop a party from entering into further contracts that contain the unfair term and, if sought by the ACCC, the Courts can prevent unfair terms from being included in future standard form contracts.

Next Steps

If you use standard form contracts or terms and conditions in your business, we recommend reviewing those documents to ensure they do not contain terms that could be at risk of being deemed ‘unfair’ and in breach of the UCT regime. An unfair term could leave you in a position where not only are you unable to enforce that part of your contract, but you could also face significant financial penalties. If in doubt, seek professional advice and guidance.

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Disclaimer

The information in this article is for general information and interest only and is not professional advice upon which readers should rely. Readers should obtain expert advice relevant to their specific circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.‍