Developments in the Australian Unfair Contract Terms Regime

On 28 September 2022, the Australian government introduced the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth) into Parliament (the Bill). This Bill introduces a new penalties regime for using and relying on unfair contract terms and extends the coverage of the unfair contract terms regime in Australia. It also proposes to widen the definition of ‘small businesses’ to include entities with up to 100 employees (increased from 20) or less than $10 million annual turnover.

Overview of the Unfair Contract Terms Regime and when it applies

The unfair contract terms regime applies to standard form contracts for the sale or lease of goods or services, sale of land, supply of financial services or financial products to consumers and small businesses.

Standard form contracts for the sale or lease of goods or services, and sale of land are governed by the Australian Consumer Law (ACL), whereas standard form contracts for the supply of financial services or financial products are governed by the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

What is a standard form contract?

A standard form contract is one in which the terms and conditions are set unilaterally and there is little scope for the consumer or small business to negotiate. Whether or not a contract is a standard form contract is a question of fact. However, in answering this question, the courts must take certain factors into consideration.[1] The Bill proposes to include a further compulsory factor for consideration: whether the parties had used the same or similar contract before.

When will a standard form contract term be unfair?

A standard form contract term is unfair if:

a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;

b) it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and

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

The transparency of the term and the effect of the contract as a whole are taken into account when determining if a term is unfair.

New prohibitions and penalties

The Bill proposes to prohibit:

a) making standard form contracts that contain an unfair term which that person proposed; and

b) applying or relying on (or purporting to apply or rely on) a standard form contract which contains an unfair term.

Any breach of these prohibitions can lead to pecuniary penalties of up to AUD $2,500,000 per breach, and there is a risk that businesses could face multiple breaches in respect of the same standard form contract (i.e. if it contains multiple unfair terms, or if an unfair term is relied upon multiple times).

The Bill also proposes the introduction of new severe penalties for breaches of the unfair contract terms regime (see table 1 below containing the proposed penalties).

What can you do to ensure compliance?

The proposed changes to the unfair contract terms regime will not come into effect until 12 months after the bill received Royal Assent. This 12-month period will be a critical time for B2C businesses that trade in Australia (regardless of their place of incorporation) to review their standard form contracts, and notably there is a real risk that we are likely to see ASIC and the ACCC commence enforcement action once the regime is in effect to deter any future non-compliance.

Please reach out to your usual Bird & Bird contacts if you require advice on compliance with the unfair contract terms regime.

Table 1 - Proposed penalties under the Bill

[1] See s 27(2) of the ACL; s 12BK of the ASIC Act.