ACL unfair contract terms vs NSW disclosure obligations for substantially prejudicial terms

Articles Written by Sar Katdare (Partner), Jaime Campbell (Senior Associate), Geoffrey Sykes (Associate)

On 1 January 2021 NSW Fair Trading began enforcing a new law requiring businesses in NSW to make disclosures regarding terms that substantially prejudice the interests of consumers (for more information see our related article).

The new disclosure obligations regarding substantially prejudicial terms (SPT) cover much of the same ground as the unfair contract terms (UCT) regime in the Australian Consumer Law (ACL), but with some important distinctions. This article explains how the two regimes interact, and how you should approach them.

What contracts do they apply to?

UCT regime

The UCT regime applies to standard form consumer and small business contracts which are for the supply of goods or services, or the sale or grant of an interest in land.  

A ‘standard form contract’ is one which is effectively not negotiated by the parties but is offered by one party to the market as the terms and conditions on which it will supply or acquire goods or services to others.

A ‘consumer contract’ is one where the acquisition of the goods or services under the contract is wholly or predominantly for personal, domestic or household use or consumption.

A ‘small business contract’ is currently defined as one where one party has less than 20 employees and the upfront price payable for the goods or services is less than $300,000 or, if the contract is longer than 12 months, it does not exceed $1 million. This definition is likely to change this year when:

  • the cap on upfront price will be scrapped;

  • a small business contract will be any contract to which a small business is a party; and

  • businesses with an annual turnover of $10 million or less, or which employ 100 people or less, will fall within the definition of ‘small business’.  

Some contracts are exempt from the UCT regime such as certain maritime contracts, constitutions of companies and managed investment schemes.

SPT regime

The NSW disclosure obligations apply to all consumer contracts (not just standard form contracts) for the supply of goods or services.  

The term ‘consumer’ has the same ACL definition which applies to the consumer guarantees regime. That is, a party is a consumer if the party purchases goods or services that are:

  • valued at less the $40,000; or

  • valued at more than $40,000 but are of a kind ordinarily acquired for personal, domestic or household use or consumption; or

  • a car or trailer.

Although the NSW disclosure obligations do not specifically apply to small business contracts, the monetary threshold in the definition of ‘consumer’ means that businesses supplying goods or services to end-customers (which may include other businesses) for less than $40,000 will be required to comply.  From 1 July 2021, this monetary threshold will increase to $100,000 (for more information see our related article) and even more B2B transactions are likely to be captured.

How do the two regimes operate?

UCT regime

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

  • would cause a significant imbalance in the parties’ rights and obligations; and

  • is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and

  • would cause detriment to a party if it were relied on.

Some examples include terms which:

  • allow one party but not the other to avoid or limit performance of the contract;

  • allow one party but not the other to terminate, renew or vary the contract; or

  • exclude liability and/or provide broad indemnities.

SPT regime

The disclosure obligations require a supplier to, before selling a consumer goods or services, take reasonable steps to ensure the consumer is aware of the effect of any term or condition in their contract that may substantially prejudice the consumer’s interests. What will amount to ‘substantial prejudice’ is yet to be determined in the courts, but the legislation points to terms that:

  • exclude liability of the supplier;
  • provide that the consumer is liable for damage to delivered goods; or
  • require exit fees or balloon payments.

Reasonable steps to disclose the terms may include plain English summaries, pop-up boxes or highlighting key terms.

What are the consequences for breach?

UCT regime

Currently, only a court can declare a term unfair with the consequence being that the term is declared void. However, due to concerns that unfair terms remain prevalent in standard form contracts and greater deterrence is needed, amending legislation is expected to be developed this year which will allow courts to determine unfair terms unlawful and impose substantial civil penalties.  

SPT regime

There is a fine of $22,000 for individuals and $110,000 for corporations who breach the disclosure obligations. Penalty notices may also be issued for suspected contraventions, of $550 for individuals and $1,100 for corporations.  

Important points of difference

While the definitions of UCTs and ‘substantial prejudice’ may be conceptually similar, not all SPTs will also be UCTs, and vice versa.  Some of the most important differences are: 

  • Reasonably necessary to protect legitimate interests:  One of the limbs under which a term is considered not to be unfair is when it is reasonably necessary to protect the supplier’s interests. Such a term may still be an SPT, so while the term would not be declared unfair by a court the supplier would still need to take reasonable steps to disclose it to the consumer.
  • Australia-wide v NSW application:  The UCT regime applies throughout Australia, whereas the disclosure obligations only apply to supplies into NSW. That includes businesses based outside NSW which supply goods or services to consumers within NSW.
  • Consequences for including terms in contract:  The disclosure obligations do not prohibit the inclusion of SPTs in consumer contracts or limit their enforceability. On the other hand the UCT regime can, when action is taken, render UCTs void and will soon attract penalties.  Care should therefore be taken to ensure that UCTs are not included whereas SPTs can be included but must be disclosed.

What does all of this mean?

Being transparent is key to minimising risk of non-compliance with both the UCT and SPT regimes. The more up front and clear you are about one-sided key terms the more likely it will be that you will comply with both sets of requirements. 

In the interests of protecting small business and promoting fair trade, the law seems to have moved a long way from laissez faire as businesses are increasingly required to highlight what might be the short end of the stick for the other party!

What do you need to do?

  1. Review all of your consumer and small business contracts (noting the upcoming definitional changes to both) to identify terms which may be unfair or substantially prejudicial.

  2. For terms in the relevant contracts which may be UCTs, consider whether the term is reasonably necessary to protect your business’s legitimate interests. If not, consider amending the term to avoid the risk of it being declared unfair and attracting penalties (which will apply, likely later this year).

  3. For terms in the relevant contracts which may be SPTs and are not ‘unfair’ (because, for example, they are reasonably necessary to protect the business’s legitimate interests), consider whether they are necessary or can be amended to mitigate the prejudicial impact on consumers. 

  4. If the SPTs are necessary, consider appropriate disclosure methods for your circumstances such as using plain English summaries, pop-up boxes or colours, illustrations and icons to highlight key terms.

 

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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