The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Act) was passed on 9 November 2022 and will come into effect on 9 November 2023. From this date, unfair contract terms (UCT) will be illegal, the UCT regime will be expanded under the Competition and Consumer Act 2010 (Cth) (CCA) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC).
The unfair contract terms regime are terms in standard form consumer or small business contracts that are declared unfair by a court, and are void and unenforceable. This Act legislates that a person contravenes the UCT regime if:
- the person 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 person proposed the unfair term, as well as if they applied or relied on, or purported to apply or rely on
It is worth noting that each unfair term found within a contract will be considered a separate breach. This could result in a court finding multiple breaches in a single contract.
These reforms will:
- a) broaden the scope of what is considered a small business;
- b) expand what a ‘standard form contract’ is; and
- c) greatly increase penalties for non-compliance.
Currently, certain categories of contracts are exempt from the UCT regime, such as if it is related to shipping, or the constitution of a company. New categories will be introduced as being exempt, including if the contract is about the operating rules of licensed financial markets, licensed clearing and settlement facilities, the operating rules of real-time gross payment or settlement systems approved by the RBA; and certain life insurance contracts.
This new regime will apply to contracts made on or after 9 November 2023, and only to a pre-existing contract where it has been renewed on or after the 9th, or varied on or after the 9th by varying or adding a term, but only in relation to those terms.
Let’s break down each area of the changes.
Reforms to the Definition of ‘Small Business’
The unfair contract terms regime applies to both consumer contracts and small business contracts. An outline of each type of contract is explained below, as well as the reforms.
A contract for:
- the supply of goods or services;
- the supply of financial products or services; or
- a sale or grant of an interest in land.
to an individual who acquires the goods, services or interest wholly or predominantly for personal, domestic or household use or consumption.
Small Business Contracts
A contract for:
- the supply of goods or services;
- the supply of financial products or services; or a sale or grant of an interest in land,
where at the time the contract is entered into:
- (currently): at least one party to the contract is a business that employs fewer than 20 persons. (Reform): at least one party to the contract is a business that employs fewer than 100 people or has a turnover of less than $10M for the previous income year; and
- (currently): the upfront price payable under the contract is less than $300,000, or if the contract duration is longer than 12 months, less than $1 million (Reform): The upfront price payable is less than $5M if the contract is for financial products or services, otherwise no threshold applies.
Reforms to what is considered a ‘standard contract’
For these unfair contract protections to apply, the contract must be a standard form contract. There are many set elements a court looks at to determine if a contract is a standard contract. It may consider any matter it deems fit, but must consider whether:
- One party has all or most of the bargaining power relating to the transaction;
- The contract was prepared by one party before any discussion regarding the transaction occurred;
- One party was required to accept or reject the terms of the contract in the form that they were presented;
- One party was given an effective opportunity to negotiate the terms of the contract;
- The terms of the contract take into consideration the specific characteristics of the other party or the particular transaction;
The Act introduces a new element a court must take into account. This is that if one party has prepared and entered into other contracts in the same or substantially similar terms and if so, how many such contracts.
These reforms will also legislate that a contract may be determined to be a standard form contract even if there is an opportunity for a party to do any of the following:
- negotiate minor or insubstantial changes to terms;
- select a term from a range of options pre-determined by the other party; or
- negotiate terms of another contract.
Penalties for unfair contract terms
Currently, a contract term found to be unfair is made void, however there are no penalties imposed on the party who made such a term. Under this Act, while the term will still be made void, consequences for unfair contract terms will now be enforced. Individuals will face maximum penalties of $2,500,000.00. For a corporation, the potential maximum penalty for each unfair term will be the greater of:
- AUD $50 million;
- 3 times the value of the benefit (if the court can determine the value of the benefit); or
- 30% of the adjusted turnover during the breach turnover period (if the court cannot determine the value of the benefit). The “breach turnover period” generally represents the duration of the breach, but 12 months is the minimum period over which the penalty is calculated.
What does an ‘unfair term’ actually constitute?
The Act does not make any changes to the test for ‘unfairness’, however, a brief overview will be made below.
A standard form contract term will be unfair if it meets all the following criteria:
- It would cause a significant imbalance in the in the parties’ rights and obligations under the contract;
- It is not reasonably necessary to protect the legitimate interests of the party advantaged by it;
- it would cause detriment (whether financial or otherwise) to a party if it was applied or relied upon.
The court must also consider the contract as a whole in considering unfair terms, as well as its level of transparency. The CCA includes a list of what may be considered unfair, however there is no determinative method to deduce a UCT; rather, it is determined on a case-by-case basis.
For more details, The CCA and the ASIC Act provide a list of types of terms that may be unfair.
While these changes have not taken effect yet, it is best to review them so that all future contracts will be made in accordance with these reforms. If you need help understanding what this means for you, please use the contact information below to get in touch with Warlows Legal today.