Significant unfair contract terms reforms commence shortly

Quick summary

• Reforms to the unfair contract terms regime in the Australian Consumer Law, and under the ASIC Act, commence on 9 November 2023.
• The reforms will extend the regime to apply to standard form (non-negotiable or lightly negotiated) contracts where a party is a ‘small business’ because its turnover is less than AU$10 million or it has fewer than 100 employees, or is a consumer.
• While terms subject to the existing regime are simply void and unenforceable, the reforms give the ACCC and ASIC the power to seek penalties of up to AU$50 million or AU$15.6 million (respectively) for offering standard form contracts with unfair contract terms.

Preparing for the reforms

There is a substantial amount of guidance and case law on the more egregious types of unfair contract terms, such as those listed as examples in the Australian Consumer Law like unilateral variation and unilateral termination rights.  However, the open ended nature of the test for ‘unfairness’ means that many common commercial terms in standard form consumer and small business contracts are potentially affected.

Aside from some of the more obvious terms which often exceed a party’s legitimate interests, such as indemnities, limitations and exclusions of liability and exclusions of warranties, some of the types of clauses which we regularly scrutinise closely are:

• rights to issue instructions or directions – especially as this may practically amount to a unilateral variation right where it causes the counterparty to incur cost in complying with new obligations;
• clauses which allow the counterparty to terminate the contract if they disagree with a party’s unilateral variation, but which do not give that counterparty adequate remedies because the termination is treated as being for convenience when it is more properly characterised as being for cause;
• rights of set off or suspension of payment – especially where they can be exercised when a party unilaterally determines that the counterparty has breached the contract and/or where the party has a claim against the counterparty;
• clauses which purport to effect privacy consents which may not constitute valid consent under the Privacy Act 1988 (Cth);
• clauses which reduce the amount of time that the counterparty can make a claim (parties generally have six years to bring a breach of contract claim under Australia’s limitation of actions laws);
• significant rights (such as termination) or remedies that can be exercised on a party’s breach, without any materiality threshold such that they could theoretically be exercised by immaterial or trivial breaches; and
• asymmetric clauses where each party has an equal interest in the other party’s performance – such as confidentiality, restriction on assignment and publicity, breach notification obligations and no-waiver clauses.

Not all these examples will be unfair in all cases, however if an organisation wants to retain the positions described above in its standard form contracts, it should be prepared to explain the legitimate interest on which it relies to justify the clause, and how a more balanced position would prejudice those interests.

Importantly, the fact a clause is industry-standard is not necessarily a complete answer to an argument that it is unfair. 

There are generally a range of options to rebalance clauses that may be at risk of being found to be unfair.  In many cases, the rebalancing option may actually better reflect how the organisation operates in practice.  Providing for mutuality or reciprocity is another simple option that addresses many unfairness risks.

Prioritising contract reviews

The unfair contract terms reforms apply to contracts entered into on or after 9 November 2023, or contracts which are extended (renewed) on or after 9 November 2023.  It also applies to any variations made on or after 9 November 2023 (in relation to the specific varied clauses).

Businesses should ensure that their standard form template contracts are reviewed for unfair contract terms prior to 9 November 2023 (allowing enough time for any associated process changes), and that any contracts which are due to be renewed after that date are rolled over to new terms which address any unfair contract terms risks.

Businesses should also be prepared for counterparties to increasingly seek to gain leverage from the UCT regime.  We anticipate that the increased focus on UCTs is likely to embolden counterparties to standard form contracts to challenge the clauses which directly or indirectly cause them detriment, or detract from the rights that they otherwise would have at law.