Unfair Contract Term Protections Significantly Bolstered by Amendments to Commonwealth Laws

Not all parties to commercial transactions are equivalent in bargaining power and business experience. As an attempt to mitigate against such imbalances, the law provides protections against unfair contract terms – these safeguards enabling a Court to declare void and unenforceable contractual terms they consider to be unjust.

Earlier this month, amendments to Federal legislation significantly expanded the protections of parties against unfair contract terms in commercial contracts. Put briefly, these amendments:

  • introduced substantial financial penalties for persons or corporations who propose, rely upon, or seek to apply ‘unfair’ contract terms;
  • enlarged the veil of protection to parties not previously protected under the previous unfair contract provisions;
  • expanded the Court’s powers to deal with unfair contractual terms; and
  • clarified the considerations to which the Court must have regard in considering whether a term is unfair.

Anyone who enters into contracts for goods or services, whether as the supplier or the purchaser, should be aware of these updated provisions.

What are Unfair Contract Terms?

An unfair contract term (“UCT”) is a term that:

  • would cause significant imbalance in the parties’ rights and obligations arising under the contract;
  • 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 (whether financial or otherwise) to a party if it were to be relied upon.

The Court assesses whether a term in a contract is “unfair” by considering a range of factors, such as the nature of the contract as a whole, the “transparency” of the term, and the relative bargaining power of the parties (along with other mandatory and non-mandatory considerations).

To Whom do the New UCT Provisions Apply?

The UCT provisions are designed to protect parties to standard form “consumer contracts” and standard form “small business contracts”. These kinds of contracts entered into on or after 9 November 2023 (i.e. new contracts and contract renewals), and specific terms of existing contracts of this nature amended on or after this date, are subject to the new regime.

However, the UCT provisions will not apply to the following:

  • Terms specifically required/permitted by law to be included in contracts;
  • Terms setting out the upfront price payable under the contract;
  • Terms defining the main subject matter of the contract; or
  • Various types of excluded arrangements (corporate constitutions, managed investment schemes and other excluded arrangements).

For school-based institutions in particular, school enrolment contracts have been held to be “standard form” contracts. Therefore, schools should pay particular attention to the UCT reforms.

What do the new UCT Provisions do?

  1. New financial penalties

The new UCT provisions take a giant stride in escalating the protections granted to parties with respect to standard form “consumer contracts” and standard form “small business contracts”, making it illegal for a party to such a contract to:

  • propose an unfair term into a contract which they have made; or
  • apply or rely on, or purport to apply or rely on, an unfair term of a contract.

A party who engages in either of the above courses of conduct may be liable for a maximum penalty of:

  • Where the contravening party is an individual – up to $2.5 million;
  • Where the contravening party is a corporation – the greater of:
    • $50 million;
    • Where the value of the benefit to the contravening party arising from the conduct is ascertainable – 3 times the value of the benefit obtained; and
    • Where the value of the benefit is unascertainable – 30% of the corporation’s adjusted turnover during the breach turnover period.

It should be noted that the above penalties are the maximum penalties per breach. This means that if a contract contains multiple UCTs, proposing or relying upon each one would be considered separate contraventions of the law.

  1. Expanded catchments of the Australian Consumer Law and ASIC Act

The amendments also significantly expand the number of businesses protected under UCT provisions. This is because of the redefined meaning of “small business contract” within the ACL and ASIC Act. Accordingly, many businesses not previously able to rely on the UCT provisions may now fall under their protective veil.

Under the new definition, a contract is considered a “small business contract” where that contract:

  • is a contract for a supply of goods or services, or a sale or grant of an interest in land (for ACL contracts); and
  • at least one party to the contract:
    1. makes the contract in the course of carrying on a business and at a time when that party employs fewer than 100 persons; and/or
    2. the party’s turnover for the last income year ending at or before the time when the contract is made is less than $10 million.
  • Where the contract is one to which the ASIC Act applies, the upfront price payable does not exceed $5 million (there is also now no equivalent upfront price threshold required by the ACL).

The catchments of these pieces of legislation are also extended by reference to changes to the Court’s mandatory considerations in determining whether a contract is (or is not) “standard form”. Accordingly, a contract can now still be classified as a “standard form contract” if:

  • a party had an opportunity to negotiate changes, to the contract’s terms, that are minor or insubstantial in effect;
  • a party had an opportunity to select a term from a range of options determined by the other party; and/or
  • there was an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

Courts, in making such a determination, will also consider whether one of the parties has prepared and made other contracts in the same or substantially similar terms, and how many times they have done so.

  1. Expansion of Court Powers

In addition to their current powers, the Courts will also have the ability to order a wider variety of relief mechanisms upon a term being declared to be unfair. Such relief might include:

  • Voiding, varying or refusing to enforce the whole or part of the contract, or of a collateral arrangement relating to the contract, that contains the unfair term;
  • Requiring the contravening party to make whole or partial redress of the loss suffered by the other party which was caused by the unfair term;
  • Making orders to prevent/reduce loss or damage likely to arise to a person from the unfair term.

In cases where the term has been declared as being “unfair”, the relevant regulator (the Australian Competition and Consumer Commission (under the ACL) or the Australian Securities and Investments Commission (under the ASIC Act)) can make an application for the Court to make orders against the contravening party, such as:

  • the making of orders/injunctions preventing a party from using a term with the same or substantially similar effect in future contracts that are protected under the unfair terms regime;
  • the making of orders/injunctions requiring the contravening party to wholly or partially redress, prevent, or reduce loss or damage actually or likely to be caused to a party by the inclusion of a similar term in any existing contract covered by the unfair terms regime.

(Injunctions/redress would apply only to contracts that are standard form contracts protected by the UCT provisions.)

Notably, the expansion of powers means that Courts can call into question any contracts in which the contravening party may have used the unfair term being challenged or a similar term, regardless of whether that particular contract was actually brought before the Court. The orders made which resulted from the regulator’s application will bind anyone affected by the order – despite that person not being a party to the particular proceedings during which the order was made.

Why are the changes to the UCT Regime important to me?

The new penalties and increased applicability of the Unfair Contract Term regime highlights the importance of ensuring that the terms of any standard form contracts used by an organisation or individual remain fair and compliant with the law. Complacency in failing to regularly review and update standard form contracts to ensure compliance may expose a party to significant legal risk.

The amendments may of particular importance to schools using enrolment contracts – especially as they may relate to forfeiture of fees where proper notice of intention to withdraw has not been provided or to wide-reaching anti-disparagement clauses (such as restricting parents from creating social media pages about a school).

If you operate using standard form contracts and suspect that some of your contracts’ terms may be potentially “unfair”, we highly recommend you seek specialised legal advice. The friendly team at Corney & Lind Lawyers can work with you to review your contracts and help ensure they remain legally compliant. Contact our friendly team today on (07) 3252 0011 or send your enquiry to enquiry@corneyandlind.com.au – we are always happy to assist.

 

This article was written by Eustacia Yates and Jackson Litzow