Article Time to revisit your standard form contracts

Time to revisit your standard form contracts? Australia set to introduce heavy-hitting penalties for unfair contract terms

29 September 2022

The Australian Competition and Consumer Commission’s (ACCC’s) long-stated objective of strengthening and introducing penalties for unfair contract term (UCT) laws is now closer to realisation, with the introduction of a bill proposing amendments to expand these laws. If passed, the amendments will significantly increase the risks associated with unfair terms across an expanded range of consumer and business-to-business contracts.

On 28 September 2022, the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Bill) was introduced to the Australian Parliament. The Bill proposes significant amendments to the UCT provisions of both the Australian Consumer Law (ACL) and the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) (together, the UCT laws).

As an indication of the significance of the changes, and to provide businesses with an opportunity to adapt to the changes prior to commencement, the proposed amendments would not come into force until 12 months after the Bill receives Royal Assent, so possibly in late 2023.

What are the UCT laws?

The current UCT laws allow a court to declare UCTs in certain standard form contracts made with consumers or certain types of small businesses void and unenforceable.

Currently, no penalties apply for using or attempting to rely on UCTs. The UCT laws are found in the ACL and ASIC Act, with those in the ASIC Act applying to relevant standard form contracts that are financial products or relate to the provision of financial services.

What are the key changes being proposed?

The Bill proposes a number of significant changes to the UCT laws which, if passed, will mean a broader range of agreements would be caught by the laws and significant penalties could be imposed on businesses that include UCTs in standard form contracts.

The proposed amendments include:

imposing significant civil penalties for contraventions in parallel with the Bill’s proposed increases to the penalties available to courts under the Competition and Consumer Act 2010 (Cth) and ACL (if the laws are passed, Australia would become the first jurisdiction in the world to introduce a top-tier civil penalty regime for proposing, using, applying or relying on UCTs);
prohibiting the proposal of, use of, application of, or reliance on, UCTs in a standard form consumer or small business contract (currently including UCTs is not prohibited, however they can be declared void by a court);
changing the thresholds for what constitutes a ‘small business contract’:
- under the ACL, certain ‘upfront price payable’ thresholds would no longer be relevant to determining if a standard form contract is made with a small business – instead, the threshold would be based on number of employees and annual turnover of a business; and
- under the ASIC Act, the upfront price payable threshold would be retained but substantially increased to A$5 million, with the same thresholds under the ACL with respect to employees numbers and annual turnover also applying.

What would these changes mean for businesses?

The proposed amendments apply to:

contracts made on or after the commencement of the relevant changes (the commencement date is expected to be 12 months after the Bill receives Royal Assent, possibly in late 2023);
existing contracts that are renewed on or after the relevant commencement date; and
terms of an existing contract that are varied on or after the relevant commencement date.

Business will therefore also need to be mindful of any renewals or amendments made to existing contracts, and whether such contracts need to be updated for compliance. That could potentially mean that the terms of the existing contract need to be substantially re-written or replaced with new terms that comply with the UCT laws.

Compliance with the existing UCT regime is already a material compliance risk for many businesses that use standard form contracts. If the proposed amendments are passed, the compliance risk will significantly increase because penalties will apply for contravention of the UCT laws for the first time.

Details of the key proposed amendments and their anticipated effects (including increased compliance risks) are summarised in the tables below.

Application of the UCT regime

Current position	Proposed change	Anticipated effects or risks
The UCT regime applies to standard form contracts with consumers and small businesses. Under both the ACL and ASIC Act, a ‘small business contract’ is one where: one of the parties to the contract (even the party that prepared the contract) is a business employing fewer than 20 employees; and the upfront price payable under the contract is less than (i) $300,000; or (ii) $1 million if the contract is longer than 12 months.	The UCT regime will continue to apply to consumers and small businesses, however the ‘small business’ definition will change so that it is met if one party satisfies either or both of the following conditions: employs fewer than 100 employees; or has an annual turnover (based on its last income year) less than $10 million. ASIC Act thresholds changed so that it is met if: the contract has an upfront price payable less than $5 million; and one party satisfies either or both of the following conditions (i) employs fewer than 100 employees or (ii) has an annual turnover (based on its last income year) of less than $10 million.	A wider range of standard form contracts will be caught by the UCT laws, including those made with businesses that would not generally considered ‘small’ (for example, businesses that employ up to 100 people). Industries where high value contracts with small businesses are more common (e.g. those with an upfront price over $1 million) may find that standard form contracts that were previously not subject to the UCT laws are now caught by the new definition and therefore will need to be carefully reviewed and updated to achieve compliance.
When determining whether a contract is a standard form contract, the court must consider whether: one party was required to reject or accept the terms of a contract in the form it was presented; and another party was given an opportunity to negotiate the terms of the contract.	A contract may be determined to be a standard form contract despite there being an opportunity for a party to: negotiate minor or insubstantial changes; select a term from a range of options; and negotiate terms of another contract. In addition, the court must consider whether a party has used the same or similar contract before.	The current UCT laws do not currently make any direct reference to ‘negotiation’. If passed, the changes would increase the risk of negotiated contracts being caught by the UCT laws. The extent of negotiations will now be a relevant factor that the court must consider, as is the extent to which the respondent has used the same or similar contract before. Previous strategies that a business may have developed to avoid the UCT laws (such as allowing negotiation of select terms only) may no longer be effective.

Current position

Proposed change

Anticipated effects or risks

The UCT regime applies to standard form contracts with consumers and small businesses.

Under both the ACL and ASIC Act, a ‘small business contract’ is one where:

one of the parties to the contract (even the party that prepared the contract) is a business employing fewer than 20 employees; and
the upfront price payable under the contract is less than (i) $300,000; or (ii) $1 million if the contract is longer than 12 months.

The UCT regime will continue to apply to consumers and small businesses, however the ‘small business’ definition will change so that it is met if one party satisfies either or both of the following conditions:

employs fewer than 100 employees; or
has an annual turnover (based on its last income year) less than $10 million.

ASIC Act thresholds changed so that it is met if:

the contract has an upfront price payable less than $5 million; and
one party satisfies either or both of the following conditions (i) employs fewer than 100 employees or (ii) has an annual turnover (based on its last income year) of less than $10 million.

A wider range of standard form contracts will be caught by the UCT laws, including those made with businesses that would not generally considered ‘small’ (for example, businesses that employ up to 100 people).

Industries where high value contracts with small businesses are more common (e.g. those with an upfront price over $1 million) may find that standard form contracts that were previously not subject to the UCT laws are now caught by the new definition and therefore will need to be carefully reviewed and updated to achieve compliance.

When determining whether a contract is a standard form contract, the court must consider whether:

one party was required to reject or accept the terms of a contract in the form it was presented; and
another party was given an opportunity to negotiate the terms of the contract.

A contract may be determined to be a standard form contract despite there being an opportunity for a party to:

negotiate minor or insubstantial changes;
select a term from a range of options; and
negotiate terms of another contract.

In addition, the court must consider whether a party has used the same or similar contract before.

The current UCT laws do not currently make any direct reference to ‘negotiation’.

If passed, the changes would increase the risk of negotiated contracts being caught by the UCT laws. The extent of negotiations will now be a relevant factor that the court must consider, as is the extent to which the respondent has used the same or similar contract before.

Previous strategies that a business may have developed to avoid the UCT laws (such as allowing negotiation of select terms only) may no longer be effective.

Consequences of including UCTs in standard form agreements with consumers or small businesses

Current position

Proposed change

Anticipated effects or risks

Where a court determines a term in a standard form contract to be unfair, it is automatically void.

A person is prohibited from proposing, applying or relying on (or purporting to apply or rely on) a UCT and penalties and new consequences will apply to contraventions (as explained below).

Each UCT contained in an affected contract would constitute a separate contravention, as would attempting to rely on the UCT. This means that multiple contraventions could arise from a single standard form contract, with each contravention attracting its own penalty.

The fact that penalties will now apply significantly increases the risk for parties. It will be critical for businesses that have previously undertaken a UCT review under the current UCT laws (without penalties) to revisit this work to determine whether different positions should be taken to account for the introduction of penalties.

No penalties currently apply for using UCTs – unfair terms are not prohibited but can be declared void by a court.

For a body corporate, the maximum penalty under the ACL would be the greater of:

$50 million;
three times the value of the benefit of the conduct; or
30% of the body corporate’s adjusted turnover during the breach turnover period for the act or omission.

For a body corporate, the maximum penalty under the ASIC Act would be the greater of:

50,000 penalty units (currently $11.1 million);
the amount of the benefit derived and detriment avoided because of the contravention multiplied by three; or
10% of the annual turnover of the body corporate for the 12-month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision, or if that amount is greater than an amount equal to 2,500,000 penalty units ($555 million), 2,500,000 penalty units.

There would also be significant penalties for individuals under both the ACL and ASIC Act.

These are significant increases to the maximum penalties. For the UCT regime, given the evaluative and somewhat uncertain process for determining whether a term is unfair, these are very significant maximum penalties.

The ‘adjusted turnover’ is a new concept and would be the total value of all of the supplies that the body corporate (and any related body corporate) has made, or is likely to have made, during the breach turnover period, with some limited exceptions. The ‘breach turnover period’ would be the duration of the breach, however 12 months is the minimum period over which the penalty is calculated.

Where a term is determined to be a UCT, and the person has suffered, or is likely to suffer, loss or damage, the court may make orders:

declaring the whole or part of the contract void or void ab initio; and/or
varying or refusing to enforce part or all of the contract.

However, such orders can only be made where a person or class of persons has suffered or is likely to suffer loss or damage.

In addition to the current powers, the court may make orders to:

redress, in whole or in part, loss or damage that has been caused, or to prevent loss or damage that is likely to be caused;
on application by the ACCC or ASIC (i) prevent a term that is the same or substantially similar to an unfair term from being included in future standard form small business or consumer contracts; or (ii) prevent or reduce loss or damage which is likely to be caused to any person by the unfair term.

The courts’ expanded powers may see an increase in orders preventing a term that is the same or substantially similar in effect to a term that has been declared unfair from being used in parties’ future standard form small business contracts.

The court may prohibit a party from applying or relying on (or purporting to apply or rely on) a term of a contract that has been declared unfair.

In addition to the current injunction powers, the court may order an injunction restraining a person from:

entering into any future contract that contains a term that is the same or substantially similar to a UCT; or
applying, or relying on, a term in any existing contract that is the same or substantially similar to a UCT, whether or not the contract is before the court.

Where a respondent is found to have used or relied on a UCT that is common across its other contracts, a court may make orders preventing the organisation from relying on those UCTs in its other contracts.

Litigation would therefore carry the risk that terms across a number of contracts will be found to be unfair (and deprived effect), even if those contacts were not subject to the proceedings.

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