Australia’s unfair contract terms (UCT) framework came into existence in 2010, when protections against unfair trading terms embedded within the Trade Practices Amendment (Australian Consumer Law) Act (No.1) 2010 became part of the Australian Consumer Law (ACL). This change had the effect, in practice, of rendering unfair terms in standard form consumer contracts void.
Further reforms took effect in November 2023, following the passage of the Treasury Laws Amendment Act 2022, which rendered such UCTs not just void, but also illegal. The Competition and Consumer Act 2010 and the Australian Securities and Investments Commission Act 2001 (“the ASIC Act”) contain significant penalties for using UCTs, with each individual term found to be unfair constituting a separate offence.
The penalties for each contravention are significant, and are as follows:
- For companies, the greater of $50 million, three times the benefit obtained from the misconduct, or 30% of the company’s adjusted turnover during the breach turnover period.
- For individuals, $2.5 million.
Essentially, a term of a consumer contract or small business contract is void if it is unfair and contained in a standard form contract.
Let’s break this down.
Consumer Contract or Small Business Contract
For the prohibition on UCTs to apply, the contract must either be a consumer contract or a small business contract.
A consumer contract is defined as a contact for the supply of goods or services, or sale or grant of an interest in land “to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.”
Prior to 9 November 2023, only consumers could rely on the protections conferred by the 2010 UCT framework when dealing with big businesses. However, from 9 November 2023, these protections also apply to small business contracts. UCT protections can be relied on by small businesses provided the contract is for the supply of goods or services, or a sale or grant of an interest in land, and at least one of the parties to the contract satisfies either or both of the following conditions:
- Businesses must employ fewer than 100 people; and/or
- Have a turnover of less than $10 million for the previous income year.
Under the ASIC Act, the UCT framework only applies to small business contracts if the price payable upfront is $5 million or less.
Term must be Unfair
Section 24 of the Australian Consumer Law (ACL) sets out when a term within a consumer contract or a small business contract is unfair. It is unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
It is important to make sure your contracts (terms and conditions, supplier contracts, etc.) do not contain unfair terms which are heavily weighted in one party’s favour. Specifically, this includes any terms which limit or exclude the liability of one party, provide for wide indemnities or automatic rollover, or give only one person the right to unilaterally vary or terminate the contract without reasonable cause.
Standard Form Contract
The final factor that must exist for the UCT provisions to apply is that the contract must be a standard form contract. Section 27 of the ACL provide a list of factors the court may consider, including whether or not one party was effectively “required to either accept or reject the terms of the contract…in the form in which they were presented” and “whether another party was given an effective opportunity to negotiate the terms of the contract.”
In cases in which a consumer alleges a contract is a standard form contract, according to section 27(1) of the ACL, it will be presumed that it is unless the other party proves otherwise.
Businesses may consider the need to get a deal across the line more important than taking the time to consider and negotiate the paperwork, or not consider this an important step.
Particularly, businesses which have dominant bargaining power and which use a standard template contract (standard form contract), or a set of terms and conditions, must take care to ensure that there are no unfair terms which may be found to be void, or even cause the deal to be set aside.
While this has already been important for a long time, with the criminalisation of unfair contract terms and the significant penalties that now apply, it is critical to ensure your contracts are not unfair and illegal!
Contact Rankin Business Lawyers for practical, on-point commercial legal guidance.
Stacey Brennan
Lawyer