Unfair contract term penalties are fast approaching!

Over the last few weeks, we have provided a deep dive into a number of topics related to unfair contract terms (UCT). The new regime comes into effect on 9 November 2023, which is fast approaching! It is important that businesses use the next few months to review their standard form contracts and if necessary, amend their contracts and current practices. This is the final post in the series and provides practical tips for what businesses should be doing to get their contracts in order for the new UCT regime and what we can expect from the ACCC.

Penalties

The new regime is contained within the Australian Consumer Law and brings with it the potential for large penalties, emphasising the importance of ensuring contracts are compliant before 9 November 2023. The maximum financial penalties for businesses found to be in breach of the UCT provision are the greatest of:

• $50 million
• Three times the value of the “reasonably attributable” benefit obtained from the conduct, if the court can determine this; or
• If a court cannot determine the benefit, 30% of adjusted turnover during the breach period.

The maximum penalty for an individual is $2.5 million.

The Australian Securities and Investments Commission Act 2001 (ASIC Act) has an equivalent provision which prohibits unfair contract terms in contracts for financial products and services. The maximum financial penalties for businesses found to be in breach of the UCT provision are the greatest of:

For companies:

• 50,000 penalty units (currently $13.75 million); or
• Three times the value of the benefit received or detriment avoided; or
• If benefit is not ascertainable, 10% of annual turnover (currently capped at $687.5 million).

For individuals, is the greater of 5,000 penalty units (currently $1.375 million) or three times the value of the benefit obtained or detriment avoided.

These penalties (both under the Australian Consumer Law and ASIC Act) are per contravention. A person is in contravention on each occasion that they apply or rely on an unfair contract term. This means that a person can potentially be held liable for a number of contraventions for the same unfair contract term, and each unfair contract term found in the contract can result in separate contraventions.

As an example, the Court recently declared 38 contract terms used by Fujifilm in 11 types of standard form contracts unfair. 38 contract terms x 11 contracts = 418 potential contraventions on the basis those 11 contracts were only entered into by one person/small business. By definition, standard form contracts are often entered into with hundreds or thousands of counterparties, and so the maximum penalty could be multiplied by the number of contracts that the business has entered into.

The Court will consider totality and course of conduct in determining penalty, but it is important to consider just how many thousand individual contraventions one unfair contract term in a standard form contract could entail.

Who will these changes impact?

These changes impact all businesses who, through a standard form, contract with consumers or small businesses. There needs to be a connection with Australia but both parties don’t need to be based in Australia – for example, overseas businesses contracting with Australian small businesses or consumers need to comply. Australian businesses contracting with overseas small businesses or consumers also need to comply.

Additionally, the definition of a small business contract is being expanded to include businesses with less than $10 million annual turnover, or less than 100 employees, this was previously less than 20 employees. This five-fold jump will be sure to see business to business contracts captured by the regime that were not previously.

What contracts are caught by the new regime?

The new regime commences on 9 November 2023, which means all contracts made on or after that date are subject to the new regime.

Contracts that were entered into prior to 9 November 2023 are not caught by the new regime, except where renewed or a term varied.

What can we expect from the ACCC?

The ACCC has long advocated for this change, and it will prioritise compliance.[1]

We anticipate that investigations and subsequent enforcement outcomes will closely follow the provision coming to effect.

Businesses in regulated industries, particularly those that heavily rely on standard form contracts (such as banks, telecommunications, energy etc) should be prepared to be carefully looked at due to their necessity for consumers.

We have a past but what will the future look like?

There is a long list of terms that have been found to be unfair in both proceedings and undertakings with the ACCC, however these decisions are often the result of uncontested proceedings or enforceable undertakings. This means that whilst precedent exists, it has not always been rigorously tested before a Court, instead agreed as unfair between the ACCC and the party. We expect that the introduction of penalties will see more cases being contested, and developments in the existing precedent.  We also expect that the existing precedent may be the subject of more rigorous testing as contested enforcement proceedings arise, with parties’ minds being focussed by the risk of pecuniary penalties.

Important steps for businesses

These four key steps are important for businesses to take:

• Identify whether any of your business standard form contracts fall within the expanded ‘small business’ threshold
• Review all standard terms (both in small business and consumer contracts) and assess their risk of being unfair
• Assess whether any terms at risk of being unfair are truly necessary – if they are, you need to be ready to defend these terms
• Update all existing template contracts and any which may flow through to remove any unfair terms

You should also ensure that you continue to regularly review your standard form contracts, particularly as the law evolves and the Court finds specific terms to be unfair.

As we are concluding our UCT series here is a handy reference table to refer to as you review your standard form contracts in the lead up to 9 November 2023, or when considering new terms. It is particularly important to seek legal advice on any terms which may fall on the grey list.

1	I’m Still Standing – Standard Form Contracts in the Unfair Contract Terms Regime	What is a standard form contract and how to identify them? What should businesses do to ensure they comply with the UCT regime?
2	Unpacking Unfair: What is an Unfair Contract Term?	What is an unfair term under the three-limb test outlined in the ACL? What are the factors the Court considers when determining whether a term is unfair? And what terms may be on the ‘grey list?
3	It’s Non-Negotiable: Unilateral Variation Clauses	What are unilateral variation clauses? These clauses are high risk under the UCT regime.
4	Don’t Go Breaking My Contract	What are unilateral termination terms and unilateral price variation terms? These clauses are high risk under the UCT regime.
5	Bringing Balance to Indemnity Clauses	What are indemnities and limitation of liability clauses? And when are they at risk of being unfair?
6	All’s Fair in Law and Forum?	What are choice forum and choice of law clauses and what to consider in ensuring compliance? These clauses are typically used when a business operates in multiple countries and needs to comply with different jurisdictions legislation.
7	Navigating Unfairness on the High Seas: Class Action Waivers and Mandatory Arbitration Clauses	What are class action waivers and mandatory arbitration clauses? And in what circumstances may they be unfair?
8	Looking beyond the grey in life: additional clauses that may fall foul of the UCT regime	This post explores clauses which are not on the ‘grey list’ but may be unfair such as automatic renewal, exclusive dealing and non-disparagement clauses.
9	Not so fair after all: Further non-grey list clauses that might fall foul of the UCT regime	This post explores clauses which are not on the ‘grey list’ but may be unfair such as extraneous contractual term and collection of data clauses.

We hope that this series has been useful. If there is any further information that may assist your business, please reach out to Peta Stevenson or Tamara Hunter.

[1] https://www.accc.gov.au/about-us/media/speeches/ceda-speech

Image credit: Tennis shake hands after match by kance / Wikimedia Commons / CC BY 2.0 / Remixed to B&W and resized. (This image was originally posted to Flickr by kance at https://www.flickr.com/photos/kentmercurio/59629166/)

This article was written by Laura Kiss and Taylor Macdonald