New laws have amended Australian Consumer Law to introduce very serious penalties for standard form contracts that are ‘unfair’ for individuals or small businesses. The changes require all Australian businesses with standard form contracts to conduct comprehensive reviews of their contracts and ensure compliance, or risk millions in fines and serious harm to their corporate reputations.

Introduction

The Federal Government made an election promise to improve the rights of consumers and small businesses faced with unfair terms in standard forms of agreement (SFOAs). Seeking to make good on this, the Treasury Laws Amendments (More Competition, Better Prices) Act 2022 (UCT Act ) received Royal Assent on 9 November 2022.  The UCT Act amends the Australian Consumer Law (ACL), which is in Schedule 2 of the Competition and Consumer Act 2010.

The ACCC Chair Gina Cass-Gottlieb welcomed in the changes as an overdue improvement,

“We have long highlighted the adverse consequences of unfair contract terms on consumers and small business, including franchisees, and suggested that they be outlawed and penalties are required to provide a stronger incentive for businesses to comply”[1]

The UCT Act makes significant changes to the kinds of terms permitted in SFOAs with significant penalties introduced for unfair contract terms for the first time. These penalties will start to apply from 9 November 2023, which is 12 months after the UCT Act received Royal Assent.

What is a SFOA?

Standard forms of agreement are not specifically defined under the ACL, but are described as having the following features:

• One party possesses the bargaining power;
• One party prepares the contract without a discussion between the parties;
• The other party must accept or reject the terms on a ‘take it or leave it basis’; or
• The other party does not have adequate opportunity to negotiate the terms of the contract.

SFOAs are extremely common in the Australian market. They are especially prevalent for organisations engaging in similar transactions of a high volume, where it is not commercially practical to negotiate a tailored agreement with every customer. Examples include:

• Online terms for websites or apps
• Online terms for marketplace or platform intermediary services, such as Airbnb, Uber and MyDeal, or other forms of online e-commerce
• Rental agreements such as for cars, bikes or skis
• Plane, bus, train and tram tickets
• Employment contracts
• Utility agreements
• Gym memberships
• Mobile phone plans

SFOAs are often a business necessity, limiting the need to negotiate contract terms with each customer, especially where the relevant business may be dealing in low margin and/or low value agreements. However, companies that use standard form contracts need to be aware of the kinds of terms that will soon be punishable with fines of up to $50m or more.

Unfair Contract Terms

Previously, Courts had the power to declare specific terms of a contract “unfair” and therefore void, but they were not prohibited and the Court could not impose penalties. Under the new UCT Act , penalties can apply to a SFOA if it:

• Causes a significant imbalance in the rights and obligations of the parties;
• Is not reasonably necessary to protect the legitimate interests of the business; and
• Causes detriment to one party if the other party seeks to rely on it.

Of specific concern are terms which may enable one party to unfairly:

• Avoid or limit their obligations under the contract;
• Terminate the contract;
• Penalise the other party for breach or termination; or
• Vary the terms of the contract.

New Penalties

Under the UCT Act , the new maximum financial penalties for unfair terms are the greater of:

• $50 million;
• Three times the value of the ‘reasonably attributable’ benefit obtained from the conduct, if determinable by the court; or
• If a court cannot determine the benefit, 30% of adjusted turnover during the breach period.

The new penalties – introduced for the first time for unfair contracts – significantly increase the previous maximum penalties for breaches of the ACL ($10 m; three times the benefit or 10% of relevant turnover).

ACCC Chair Cass-Gottlieb has referred to these penalties as a way of ensuring that businesses don’t treat the fines as the “cost of doing business” but as a significant sanction to get the attention of business owners and shareholders.

New Definition of Small Business

Under the UCT Act , the definition of ‘small business’ will change to:

• Businesses with less than 100 employees (increased from less than 20 employees); or
• Businesses with an annual turnover of less than $10 million.

Under the ASIC Act, the protections will apply to a ‘small business contract’ if:

• the upfront price payable does not exceed $5,000,000; and
• one party to the contract:
  • employs fewer than 100 people; or
  • has a turnover for the last income year of less than $10,000,000.

This updated definition moves the threshold well above what is typically considered a ‘small business’ in Australia. It means that a greater number of businesses, with which an entity using SFOAs contracts, will be protected by the UCT Act , leading to a higher prospects of fines being issued.

Does the UCT Act  Apply To Our Business?

Begin by asking these questions:

• Do we use business contracts which are considered ‘standard form’
• Does the contract contain terms that could be considered ‘unfair’
• Are we contracting with:
  • Consumers; or
  • Businesses with less than 100 employees or $10m turnover

 If you answered ‘yes’ or ‘maybe’ to the above, you should review your agreements and amend them to avoid the risk of serious fines and/or damage to your business reputation.

Next Steps

Any business that uses a SFOA is at risk of a fine if their contract is unfair to small businesses or individuals. The changes to law came into effect on 9 November 2022. From that date, businesses have 12 months to review and amend standard form contracts before the penalties for unfair terms apply.

If you require advice in relation to your standard form contracts, please contact us below.  We can quickly and cost-effectively review your contracts and recommend the minimum changes to be made to enable you to stay on the right side of the new laws.

[1] https://www.accc.gov.au/media-release/accc-welcomes-new-penalties-and-expansion-of-the-unfair-contract-terms-laws#:~:text=The%20Treasury%20Laws%20Amendment%20(More,take%20place%20after%20it%20commences.