Get Ready for Changes to Unfair Contract Term Laws

By Raynia Theodore, Principal and Angela Wang, Law Clerk

 Introduction

The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth) passed both Houses of Parliament on 27 October 2022 making significant changes to the Competition and Consumer Act 2010 (Cth) (“CCA”) as well as the Australian Consumer Law (“ACL”).

 The key changes:

• significantly increased penalties, to ensure that the ‘price of misconduct is high enough’ to deter anti-competitive conduct; and
• strengthening of the unfair contract terms regime, by making it a contravention of the ACL to make a contract and/or include, apply or enforce terms in standard form contracts that are deemed to be ‘unfair’.

Also note that mirroring provisions in respect of unfair contract terms are made to the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”)

 Increased penalties

Pecuniary penalties for breaches of the CCA have remained static and the general view of government and the Australian Competition and Consumer Commission has been that previous fines have failed to provide adequate deterrence and businesses simply view competition and consumer law contraventions as an ‘acceptable cost of doing business’.

The Bill imposes the following increases to maximum penalties under the CCA and ACL:

Contravening party	Current penalties	New penalties
Corporations	The greater of: ·         $10 million; or ·         Three times the value of the benefit obtained; or ·         Where the value of the benefit cannot be determined, 10% of annual turnover of the body corporate in the 12 months prior to the act or omission	The greater of: ·         $50 million; or ·         Three times the value of the benefit obtained; or ·         Where the value of the benefit cannot be determined, 30% of the adjusted turnover during the breach turnover period for the act or omission
Individuals	$500,000	$2.5million (up from $500,000 for civil contraventions or 2,000 penalty units amounting to $444,000 for criminal cartel offences).

 The newly inserted ‘breach turnover period’ will be calculated from when the corporation began to when it ceased committing the relevant contravention, with the minimum period being 12 months (irrespective of one-off or instantaneous contraventions).  This differs from the current position, where the turnover penalty limb is based only on the annual turnover of the body corporate in the 12 months preceding the contravention. Further, the new 30% adjusted turnover is calculated on the value of all supplies made by the body corporate as well as its related bodies.

Notably, these increased penalties are per contravention.  The Court retains its discretion to determine the most appropriate penalties – for example, in a recent Australian Competition and Consumer Commission (‘ACCC’) case against Uber, the court expressed that the jointly proposed penalty of $26 million was inappropriate and excessive given the ‘trivial effect’ the alleged conduct had on its consumers.

Interestingly, the significant fivefold increase for individuals suggest that there may be an increase in whistle-blowers and immunity applications from individuals who are involved in anti-competitive conduct.

These increased penalties are intended to apply from the date the Bill receives Royal Assent (28 October 2022) such that the current regime will still apply to conduct that occurs prior to the laws taking effect.  As they apply to contraventions of the CCA, this substantially increases penalties applicable to anticompetitive conduct such as cartel conduct and misuse of market power as well as consumer law contraventions such as unfair contract terms (further discussed below).  The increase in penalties is consistent with recent trends exemplified by the ACCC and Courts, in the imposing of heavier penalties.

It is worth noting that the penalty increases do not apply under the ASIC Act.

 Unfair contract terms

The current regime ‘has not provided sufficient deterrence against the use of unfair terms, which remain prevalent in standard form contracts’.  Accordingly, the new legislation shifts the unfair contract terms regime from one where unfair terms may only be declared void, to one that may attract heavy pecuniary penalties.  This is to address the fact that many companies have chosen to leave unfair terms in their contracts, leaving the onus on the vulnerable parties to challenge such terms to declare them as void.

As a refresher, the current unfair contract term provisions in the ACL consider a term to be unfair in a standard form consumer or small business contract if the term would:

• cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• 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 to a party if it were to be relied upon.

 Expansion of definitions

“small business’”

The amending legislation will apply to standard form ‘small business’ contracts with the definition of small business expanded to capture businesses with:

• fewer than 100 employees (previously 20 employees); or
• an annual turnover of less than $10m (previously, upfront price payable under the contract of less than $300,000 or $1m for a contract longer than 12 months).

For contracts to which the ASIC Act applies, the amending legislation increases the financial threshold from $3m to $5m.  Additionally, the definition of small business is expanded to include entities with:

• up to 100 employees (previously 20); or
• with up to $10m in annual turnover.

“standard form contract”

Additionally, greater clarity has been provided as to what constitutes a ‘standard form contract’. These are contracts provided at significant volumes to customers on a ‘take it or leave it basis’.  They often contain unfair contract terms which are to the disadvantage of a party due to the imbalance of bargaining power.  Previously, in determining whether a contract is standard form, courts will take into consideration:

• whether one party was required to accept or reject the terms of the contract in the form in which it was presented; or
• whether the party was given an effective opportunity to negotiate the contract terms.

These considerations have been extended to consider:

• whether a party has used the same or similar contract before; and
• the number of times that it has been done.

Further, a contract may be considered a standard form contract despite an opportunity for:

• a party to negotiate changes which are of minor or insubstantial effect;
• a party to select a term from a range of options as determined by another party; or
• a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

 Remedies

In addition to the increased penalties outlined above, the Bill also introduces new remedies.  Previously, courts were able to void, vary or refuse to enforce all or part of the contract including the unfair contract term.  In addition to this, the amending legislation provides the courts’ jurisdiction to make orders it considers appropriate to redress loss or damage that is caused, or to prevent or reduce loss or damage likely caused by the unfair contract terms.  This may include injunction relief, such as preventing a party from including a term in any relevant contract in the future that is the same, or substantially similar, in effect to a term that has been declared as an ‘unfair term’.

 Commencement and transition period

The changes in the unfair contract terms regime will come into effect 12 months and 1 day after receiving Royal Assent (28 October 2023).  According to the Explanatory Memorandum, the amendments are set to only apply to:

• standard form contracts entered into at or following commencement of the reforms;
• existing standard form contract which are renewed at or after commencement; and
• terms of an existing contract which are varied at or after commencement.

This provides businesses with one year to review and amend their standard form contracts to avoid contravention of the new provisions.

In contrast, the increased penalties under the CCA and ACL take effect from the date the Bill receives Royal Assent.

 Key takeaways

The significant amendments to the CCA and ACL emphasise the importance of consumer-facing businesses to begin careful reviews of their standard form contracts as well as the processes for proposing or purporting to rely upon them.  As a business, you should keep on top of increased penalties and expanded provisions in order to minimise your risks of attracting penalties.

We recommend any businesses using standard form contracts firstly consider whether any of their suppliers or customers fall within the expanded definition of small business and if so assess and undertake a full review their standard form contracts to identify potentially unfair terms and either amend or remove them.

How MST can help

Our Corporate Advisory and Franchising Team can assist you in understanding your competition and consumer law risks.  If you have any queries or concerns in relation to the above, please contact a member of our Corporate Advisory and Franchising Team on +61 3 8540 0200 or as follows:

John Sier on (03) 8540 0270 or john.sier@mst.com.au

Michael Carr on (03) 8540 0260 or michael.carr@mst.com.au

Raynia Theodore on (03) 8540 0242 or raynia.theodore@mst.com.au

Esther Gutnick on (03) 8540 0267 or esther.gutnick@mst.com.au