Navigating the Unfair Contract Terms Regime. Is your business affected by the changes?

In brief - 98% of all Australian businesses are affected by the unfair contract terms regime, and by 9 November 2023, should manage their risk around unfair contract terms. Failure to do so can have severe consequences.

On 9 November 2023 the new unfair contract regime will come into effect under the Competition and Consumer Act 2010 (Cth) (CCA) and the mirrored provisions in the Australian Securities and Investments Commission Act 2001 (Cth) in two parts: 

1. the introduction of penalties and other changes relating to unfair contract terms in standard form contracts with consumers and small businesses; and 
2. significant increases in maximum penalties for breaches of certain provisions of the CCA, including the Australian Consumer Law (ACL).

Previously, Courts could declare specific terms of a contract unfair and therefore void; however, unfair contract terms were not prohibited and the Court could not impose penalties on businesses that included them in standard form contracts for consumers or small business. In practice, the law lacked a real deterrent and did not incentivise larger suppliers to make their standard terms fairer.

In addition to the substantial increase in the maximum civil penalties, Courts will be empowered to make more flexible orders to prevent or reduce loss or damage in relation to the use or reliance on an unfair contract term.

The changes will mean more small business contracts,  in standard form will be caught by the unfair contract terms protections found in the ACL, as these protections apply to more companies, as the changes apply to businesses that employ fewer than 100 people or have an annual turnover of less than $10 million, irrespective of the value of the contract. This is a significant increase in reach compared to the previous legislation.

The amendments will apply to:

• new standard form contracts entered into on or after the Commencement Date
• existing standard form contracts that are renewed on or after the Commencement Date
• a term of an existing standard form contract that is varied on or after the Commencement Date (it is important to note that the new regime will only apply to the terms which are varied). 

What are the new maximum civil penalties?

Outlined below are the key increases to maximum civil penalties (both for a breach of the ACL, including the unfair contract term provisions, and a breach of a relevant civil penalty provision in Part IV (Anti-competitive conduct) of the CCA):

The fivefold increase in the maximum penalty for individuals to $2.5 million is significant given the prohibitions in sections 77A and 77B of the CCA. These provisions prevent companies from indemnifying company officers and individual executives for civil penalties for breaches of Part IV (Anti-competitive conduct) of the CCA, and in respect of legal fees if found liable for a contravention. 

How to determine if your contracts are affected by the changes

Unfair contract terms laws apply to:

• 'consumer contracts’ (for a supply of goods or services to an individual for wholly or predominantly personal, domestic or household use or consumption); and
• 'small business contracts', 

that are in a 'standard form contract' (typically, a contract that is not subject to negotiation between the parties (eg: ‘take it or leave it’ terms)). 

Importantly, the impending updated unfair contract terms rules mean the thresholds for what constitutes a small business expand so that more commercial parties will be subject to those laws (including penalties for breaching parties and better access to protection where a party is affected). 

What is an unfair contract term? 

The amendments to the unfair contract regime will not make any changes to what is considered an unfair contract term. However, it is important to be aware of the test applied when determining whether a term is an unfair. 'Unfairness' in each case will be judged by the particular context. 

A term of a consumer contract or small business contract is considered unfair if it:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract; 
• is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; or
• would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The ACL sets out a guide to the sort of clauses that may be invalid (the 'Grey List'). Broadly these include terms which: 

• allow one party (but not the other) to evade or limit its obligations and responsibilities under the contract;
• allow one party (but not the other) the right to vary, renew or terminate the contract;
• allow one party to vary the upfront price payable under the contract without the other party having the right to terminate the contract;
• penalise one party (but not the other) for breaches of contract or termination of the contract.

What is invalid in one contract, might be commercially justified in another (even in the same industry). The Grey List only serves as a guide for Courts when assessing the fairness of a term, without establishing a presumption that such terms are inherently unfair. Generally, when a Court is considering whether a term from the Grey List is unfair, Courts will continue to evaluate each term based on the criteria for fairness, taking into account the term's transparency, the overall contract and any other relevant factors.

What does this mean for 'commercial contracts'?

For most types of commercial businesses, the changes will apply to contracts such as the list below, where they are in a 'standard form':

• standard terms and conditions
• sale or supply contracts
• online terms (click-wrap, scroll-wrap, web-wrap)
• end user agreements, software licensing, resale agreements, 
• purchase order conditions
• consulting contracts 
• service contracts  
• maintenance contracts
• contracts held between a head contractor and subcontractors
• hiring, leasing or licensing conditions
• conditions for tenders and requesting expressions of interes
• nondisclosure agreements
• conditions imposed through notices or tickets – such as for use of the facility, for car parks or for entertainment
• building contract conditions
• employment conditions 

What does this mean for businesses in the technology industry?

For Australian technology businesses that follow US technology contract practises, including those who use an American style contract template, 'sourced' their terms via Google, or use terms modified from the US or elsewhere, there is a high risk that their standard terms and conditions of supply will contain unfair contract terms.

As is well known in the industry, too often, contract terms are overwhelmingly in favour of the technology vendor or supplier as the relevant product is considered "off the shelf" or the product is "just a platform, just a service, just a tool" etc. The result being that the risk allocation is "all care, no responsibility" so the terms are supplied on a "take it or leave it " basis. 

Although what is a fair term and what is an unfair term will depend on each business, the product or service to be supplied and how the overall contract operates (eg: are counter-balancing terms used), technology suppliers will recognise some of the following provisions which are at a high risk of being considered unfair:

• the customer giving an uncapped (or potentially any) indemnity for any use or breach of the contract however the software vendor supplies the software "as is" and without liability (or subject to a low limit of liability);
• vendors and suppliers having the right to vary terms and pricing but the customer not having a right to negotiate or terminate when such variation is imposed;
• automatic renewal terms that do not provide the customer a reasonable chance to terminate  or where terminating will incur substantial costs.

What does this mean for companies in the construction industry?

Specifically for businesses in the construction sector, the changes will apply to: 

• standard form industry contracts, including HIA, MBA, ABIC, AS, GC21, FIDIC, ICE, NEC;
• bespoke contracts, including amendments, special conditions and variations to standard forms;
• contracts with principals, owners, trades, consultants, sub-contractors, suppliers, certifiers financiers and insurers;
• construction contracts, design and construct contracts, consulting agreements, client architect agreements, certifier engagements, supply contracts, supply and install contracts, maintenance contracts, remediation contracts, rectification contracts, hire agreements, lease arrangements, tripartite deeds, finance agreements, novation deeds, construction loans and insurance contracts.

What does this mean for companies in the property industry?

• Off-the-plan contracts
• One off sale of land contracts
• Shopping centre leases
• One off leases
• Options
• Estate agents authorities
• Management agreements
• Building contracts
• Service contracts

The increase to the eligibility threshold for small businesses, as well as the substantial increase in the maximum civil penalties, heightens the risk profile and likelihood of a clause in your standard form contracts being contested by a counterparty. This also significantly increases the potential costs attached to the consequences of a clause being found to be an unfair contract term. It is a timely reminder to review any current standard form contracts to remove any unfair contract terms.