The Government passes legislation to overhaul the unfair contract terms regime

What has happened?

• The Government has passed legislation to amend the Australian Consumer Law (ACL) and strengthen the unfair contract terms (UCT) regime. 
• The provisions of the Act that amend the UCT regime will come into effect on 9 November 2023[1] and overhaul the UCT regime by substantially expanding its application, introducing financial penalties, and giving courts greater flexibility in terms of remedies.
• The Act also significantly increases the maximum penalties associated with a range of existing contraventions under the Competition and Consumer Act 2010 (Cth).

How does the UCT regime currently work?

The ACL deems unfair terms in standard form contracts with consumers or small businesses void and unenforceable. This means that the contract continues to operate as though the unfair term never existed, provided it is still capable of binding the parties. There are no other consequences associated with unfair terms under the current regime.

A contract is a standard form contract if its terms and conditions are offered to the other party effectively on a “take it or leave it basis”. ‘Consumer’ contracts are those for the supply of goods or services for personal, domestic or household use or consumption. ‘Small business’ contracts are those in which one party is a business with fewer than 20 employees and the contract has an upfront price of less than $300,000 (or $1 million for a contract lasting more than 12 months). The UCT regime applies to suppliers and customers.

A term is unfair if it:

• causes 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 it; and
• would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The degree of transparency and the effect of the contract as a whole are also relevant overall factors.

What will change?

What action do you need to take now?

The Act provides for a 12-month grace period for the UCT changes and will not come into effect until 9 November 2023, but given the application of substantial fines and the broadened scope of the regime, you should be starting the process of:

1. identifying whether the UCT regime applies to you and whether you use ‘standard form’ contracts under the expanded definition;
2. determining whether any of the counterparties to these standard form contracts are a consumers or small businesses;
3. resolving any uncertainty about whether particular counterparties are small businesses by seeking written confirmation about employee and turnover numbers – this should be done annually;
4. determining how you will roll out compliant contracts i.e., one set of terms that is fully compliant, separate sets of terms for small businesses and larger businesses or one set of terms that provides alternative clauses depending on the status of the counterparty;
5. reviewing all affected contracts for terms that are one-way or clearly in your favour and determine whether these terms are reasonably necessary to protect your legitimate interests;
6. for any such identified terms, seeking legal advice as to whether they may be unfair and require amendment; and
7. rolling out the new terms (or set of terms) and updating internal processes where necessary.

The Australia Competition and Consumer Commission (ACCC) has argued strongly for these changes and will be keen to run test cases (once the grace period ends). We anticipate that the ACCC will also seek to emphasise the seriousness of this type of conduct in enforcement actions to press for substantial penalties.

[1] Schedule 2 of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth). The Act reforms both the Competition and Consumer Act 2010 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

[2] The equivalent ASIC Act protections will continue to retain a value threshold for small business contracts, with the UCT regime applying where the upfront price payable is $5 million or less.

[3] Pursuant to this amendment, a contract may still be in standard form despite a subset of consumers or small businesses being able to negotiate the contract terms that are issued to a broader group of consumers or small businesses. See the Explanatory Memorandum to the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth) at 2.58.