Changes to Unfair Contract Terms protections

Changes which have expanded the unfair contract terms protections in the Australian Consumer Law commenced on 9 November 2023. Virtually all businesses are affected by the changes and should review their standard form consumer and small business contracts to ensure they do not include any ‘unfair contract terms’.

The unfair contract terms protections are not new but in practice were of limited effect as the courts could only declare specific terms of a standard form contract with consumers and small businesses unfair and therefore void but unfair terms were not prohibited and the courts could not impose penalties on any business that included the terms. The amended protections make unfair contract terms illegal and include substantial penalties for including unfair terms in a contract. The definition of a ‘small business’ contract has also changed to increase the reach of these new provisions.

What contracts are affected?

The amendments apply to:

  • Standard form consumer and small business contracts that are entered into or renewed on or after 9 November 2023
  • A term of a standard form consumer or small business contract that is varied on or after 9 November 2023 but only to the terms which are varied.

What is a consumer contract and small business contract?

A consumer contract is a contract for the supply of goods or services, or a sale or grant of an interest in land, to an individual for wholly or predominantly personal, domestic or household use or consumption.

A small business contract is a contract for the supply of goods and services, or sale or grant of an interest in land, where at least one party to the contract is a small business (i.e. a business that employs 100 or fewer people at the time the contract is signed or has a turnover for the last income year of less than $10 million) irrespective of the value of the contract.

What is a standard form contract?

A standard form contract is a contract that is not subject to negotiation between the parties. In deciding if a contract is in standard form courts must take into account the matters that are listed in the ACL (i.e. the relative bargaining power of the parties, who the contract was prepared by, if the terms were ‘take it or leave it’, if there was an opportunity to negotiate the terms and whether the terms took into account the specific characteristics of another party or the particular transaction), or if the contract is a financial product or for the supply of a financial product or service the matters listed in the ASIC Act 2001.

What is an unfair contract term?

The changes to the ACL have not changed what is considered an unfair contract term. A term may be considered unfair if it:

  • would cause a significant imbalance in the parties’ rights and obligations arising under the contract
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term, or
  • would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

It should be noted that what is invalid in one contract, might be commercially justified in another (even in the same industry).

What are the new penalties?

From 9 November 2023, the maximum penalties that apply for including unfair contract terms in a contract are:

For Companies:

The greater of:

–       $50 million; or

–       3x the value of the benefit obtained

If the value of the benefit cannot be determined, 30% of the adjusted turnover during the breach turnover period (i.e., over the period the breach occurred, with a minimum of 12 months).

For Individuals:

–       $2.5 million

Each unfair contract term included in a standard form consumer contract or small business contract may result in a separate penalty.

If a court finds that a term is unfair, it can also make a range of orders, including to:

  • declare all of part of the contract to be void
  • vary the contract or refuse to enforce some or all of the terms of the contract
  • direct the business to refund money, return property or provide relevant services to the affected consumer or client
  • prevent the same or a substantially similar term from being included in any future standard form consumer or small business contract.
If you have any questions regarding the changes, please contact us for further advice on 03 5434 6666.