Fair go mate! Penalties for unfair contract terms coming soon

Introduction

The Australian Competition & Consumer Commission (ACCC) has repeatedly highlighted the importance of unfair contract terms (UCT) provisions, as they ‘protect consumers and small businesses against terms…that take advantage of [an] imbalance in bargaining power.’ Last year, the Commonwealth Government passed the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), broadening the scope of the existing UCT regime while introducing monetary penalties for the first time.

The changes take effect from 9 November 2023 and will impact standard form contracts involving consumers and small businesses. Whereas previously a UCT was simply held void, a company which makes or purports to rely on a UCT could now be subject to civil and other penalties which can be directly enforced by the consumer. The applicable penalties are also cumulative so they may apply to each instance of a standard form contract being used.

Cryptocurrency exchanges and other crypto businesses which apply standard form contracts such as Terms of Service, template commercial contracts and click-wrap terms will need to review these contracts and consider necessary changes to terms which are at risk of being deemed unfair.

The significant consequences which may apply were highlighted last week by the ASIC's enforcement action against Paypal seeking orders voiding certain small business contracts which contained terms which placed the burden of identifying improper fees and charges on the business customer. Luckily for Paypal, had the ACCC waited until November to bring its action, it may have been facing potential civil penalties under the new UCT regime.

What is an unfair contract term?

Under the Australian Consumer Law (ACL), a term is unfair if:

1. It would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

2. It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

3. It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

In considering whether a term is unfair, the Court will have regard to the contract as a whole and whether the term is transparent (e.g. whether it is specifically drawn to the attention of the consumer). The burden of proving that a term is necessary to protect a party’s legitimate interests falls on the party seeking to rely on it.

The ACL generally does not govern contracts concerning financial products or supply of financial services, but similar UCT protections will apply to contracts in relation to financial products and services under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

What are examples of UCTs?

The determination of whether or not a term is unfair requires a case-by-case analysis of the parties involved and their interests, relevant contractual rights and obligations.

The following are examples of terms identified in the ACL that may be deemed unfair depending on the circumstances. Terms that permit or have the effect of permitting:

• One-sided avoidance or limiting of performance

• One-sided termination rights or penalties

• One-sided unilateral variation rights

• One-sided renewal or non-renewal rights

• Unilaterally varying characteristics of what is being supplied

• Unilateral breach determination

• Limits on one party’s vicarious liability for agents

• One sided assignment clauses to detriment of another party

• Limits on one party’s right to sue another party

This list is not exhaustive. A number of recent enforcement actions provide additional guidance on those terms which the Courts may regard as unfair.

Certain terms are excluded from the application of the UCT regime, including terms that are required or expressly permitted by law, terms defining the subject matter of the contract and terms setting the upfront price payable. Terms incorporated or implied by law and contracts concerning the operating rules of licensed financial markets, settlement and payment systems, as well as certain life insurance contracts and contracts involving licensed markets will also be exempt.

What contracts do the changes apply to?

The types of contracts that the new UCT regime applies to include standard form consumer and small business contracts that concern the supply of goods or services, or a sale or grant of an interest in land. The supply of financial services and products is also covered under the ASIC Act.

Further changes to the ACL and ASIC Act will expand the scope of contracts covered by the UCT regime.

	Until 9 November 2023	From 9 November 2023
Standard form contract	To determine whether a contract is a standard form contract, the court must take into account: Parties’ bargaining power Whether the contract was prepared by one party prior to discussions with the other party Whether a party was required either to accept or reject the terms in the form they were presented Whether a party was given an effective opportunity to negotiate Whether the terms take into account the specific characteristics of the party or the particular transaction	The new regime adds that a standard form contract may be found despite the opportunity to: Negotiate minor or insubstantial changes Select a term from a range of options Negotiate terms of another contract or proposed contract
What is a small business contract?	At least one party is a business that: employs <20 persons; and Upfront price is ≤ $300k or $1m (if the contract has a duration of more than 12 months).	At least one party satisfies either or both of: Contract is made in the course of business and at a time when it employs < 100 persons; and/or Turnover at the end of last income year was < $AUD10M

The new provisions will apply to contracts that are established on or after 9 November 2023 (commencement date) and do not apply to contracts made before this date unless:

• the contract is renewed on or after the commencement date, in which case the changes apply to the contract from the renewal date; or

• it is varied on or after the commencement date in which case the changes apply to the varied or newly added term from the date of variation or addition.

What are the potential penalties?

If a UCT is identified under the new regime, the court may for the first time impose civil penalties on the offending party, and can also void, vary or refuse to enforce part or the whole of the contract which may also impose additional financial consequences.

The following table summarises the new penalties under the ACL. It should be noted that similar changes are being implemented in relation to the provision of financial services and financial products under the ASIC Act, which also include significant civil penalties.

	​Until 9 November 2023	​From 9 November 2023
Maximum penalties for businesses and individuals	​UCT held void and other ancillary orders.	Maximum financial penalties for businesses under the ACL are the greatest of: AUD$50M; Three times the value of the "reasonably attributable" benefit obtained from the conduct, if the court can determine this; or if a court cannot determine the benefit, 30% of adjusted turnover during the breach period. Maximum penalty for an individual is AUD$2.5M.

What should you do next?

Given the expanded scope of the UCT regime and very significant penalties which may apply for companies seeking to rely on or impose UCT, it is important that companies review their standard form contracts before the changes come into effect and before renewing or varying any existing contracts.

Prior to 9 November 2023, companies should:

• review existing standard form contracts (including terms and conditions);

• identify any terms that may be subject to challenge under the new UCT regime;

• consider appropriate revisions to those terms.

Please contact the Piper Alderman Blockchain Team if you require assistance.

Thanks to Tim Masters and Kelly Kim for their assistance in preparing this article.