August 14, 2023
August 14, 2023

Changes to the unfair contract terms regime – what does your business need to do?

Back to news archive

Changes to the unfair contracting provisions of the Competition and Consumer Act 2010 (Cth) (CCA) and the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) are due to take effect from 9 November 2023. The changes:

  • expand the type of contracts that may be subject to the CCA and ASIC Act; and
  • apply significant penalties for noncompliance.

Ahead of the changes taking effect, Australian businesses, including those that were previously unaffected by the unfair contracts regime, should review their standard form contracts to ensure they do not contain any unfair contract terms.

What is an unfair contract term?

A term of a standard form consumer or small business contract may be unfair if it:

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

Whether a contract term is ‘unfair’ depends on the particular circumstances of that contract and ultimately can only be determined by a Court.  However, guidance can be obtained from examples given by the ACCC and applicable case law. Terms which could be ‘unfair’ include:

  • automatic renewals of contracts without notice or where the automatic renewal period is excessively long
  • where indemnities only apply to one party and not to the other party
  • where a party has a right to update terms (including varying the fees) without providing prior notice to the other party
  • unilateral rights to suspend performance of a contract without notice
  • requirements for pre-payment with no ability to get a refund for unused services/products
  • a term that permits one party (but not the other) to terminate the contract for convenience
  • excessive early termination charges or other ‘exit fees’
  • low liability caps (e.g. limiting liability to fees paid where minimal fees are paid upfront)
  • a term that penalises one party (but not the other) for a breach or termination of the contract.

What are the changes to the unfair contract terms regime?

The changes to the unfair contracts regime offer increased protections for consumers and small businesses, and include:

1. Prohibition on unfair contract terms

Previously, if a Court found a relevant contract term ‘unfair’ the Court could deem that term void and unenforceable. Under the new regime:

  • The proposal, use or application of, or reliance on, unfair contract terms is prohibited.  
  • A Court may impose pecuniary penalties for breaches, noting that each unfair term contained in a contract could be considered a separate breach.
2. Small business contracts

The new regime will apply to a contract if one party to the contract is a ‘small business’.  The definition of ‘small business’ has been expanded to be one that:

  • employs less than 100 people (increased from the previous threshold of 20 people); or
  • had an annual turnover of less than $10 million in the preceding income year (new).

In circumstances where the ASIC Act applies (i.e. in relation to financial products and services) there is an additional requirement that the upfront price payable under the contract does not exceed $5 million (increased from $1 million) .

3. Standard form contracts

A contract may be determined to be a ‘standard form contract’ despite there being an opportunity for a party to negotiate minor changes to the contract or to select a term from a range of options provided.  

4. Court powers

Increased penalties were introduced in November 2022 for breaches of the CCA and those penalties will apply to the new unfair contract terms regime.  For individuals, the maximum penalty that may be imposed by a Court is $2.5 million and for companies, the maximum penalty is the greater of:

  • $50 million;
  • three times the value of the benefit obtained and reasonably attributable to the breach, if that can be determined; and
  • if the value of the benefit cannot be determined, 30% of the company’s adjusted turnover during the breach turnover period (i.e. over the period the breach occurred, with a minimum of 12 months).

In addition to these penalties, the Court will have additional powers, including to:

  • make orders it considers appropriate to redress loss or damage that has been caused or to prevent or reduce loss or damage that is likely to be caused by an unfair contract term;
  • make orders with respect to the whole contract and not just the void term if necessary to prevent loss or damage; and
  • prevent a person from applying or relying on an unfair contract term in an existing contract, or making future contracts that rely on an unfair term.

The expanded unfair contracts regime will apply to standard form consumer contracts and small business contracts: (i) entered into from 9 November 2023; or (ii) renewed or varied from 9 November 2023.

What does your business need to do?

The changes broaden the scope of contracts that will fall within the revised unfair contract terms regime and can result in significant financial penalties for businesses.  It is likely that the Australian Competition and Consumer Commission (ACCC) will be prioritising enforcement of the new regime and will be active in commencing proceedings against businesses who have not complied with their obligations.

Your business should carefully review its standard form contracts with small businesses and consumers for terms that are potentially unfair.  As part of this review your business should identify, and ensure it has systems in place to continue to identify, all commercial partners who may fall within the new definition of ‘small business’.  

If you need assistance reviewing your contracts and ensuring compliance with the updated unfair contracts regime, please call Sierra Legal.

Other articles you may be interested in