Changes to the current unfair contract terms laws in Australia have been introduced over the last few years, with penalties for failure to comply with these changes coming into effect on 10 November 2023. It is now illegal to use or rely on an unfair contract term in a consumer or small business standard form contract, and the court has the power to impose serious financial penalties for businesses (and individuals) who breach these laws.

Key Takeaways

The current unfair contract terms laws in Australia have changed, and businesses (including contractors and large subcontractors) may soon be up for penalties that start at $50 million for businesses!

Upcoming Legislation Changes (10 November 2023)

The Australian Government has passed legislation to strengthen protections against unfair contract terms. Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth) (UCT Reform Bill) introduces massive penalties for unfair contract terms and expands the scope of the unfair contract terms regime. The new legislation has mostly commenced, with the introduction of the penalties commencing on 10 November 2023.

Penalties for Unfair Contract Terms

The new legislation has introduced penalties for businesses that include unfair contract terms in their standard form contracts. These penalties are aimed to discourage businesses from including unfair terms in their standard form contracts (which small businesses and consumers are less likely to be able to negotiated).

The penalties can be from $2.5 million for individuals and $50 million for companies. The penalties apply PER UNFAIR CONTRACT TERM, not per contract, and apply from 10 November 2023.

Expanded Scope of Unfair Contract Terms Regime

The new legislation also expands the scope of the unfair contract terms regime. It applies to a wider range of contracts due to significant changes to the definitions of small businesses and consumers.

Small businesses are now protected from Unfair Contract Terms if they have 100 or fewer employees or make less than $10 million in annual turnover.

Impact on Businesses

The changes to the Unfair Contract Terms regime, particularly the increased penalties, will have a significant impact on businesses.

Businesses that meet the criteria and have not reviewed their contract terms may face substantial penalties. It is crucial for businesses to review their contracts to ensure they are compliant with the new legislation. This includes asking:

(1) Is this a standard form contract?

(2) Does the standard form contract contain any unfair contract terms?

Read our post on the Unfair Contract Terms Changes

What are the Unfair Contract Terms Laws

Dozens of articles have been written by Law Firms about the differences between the previous, the current and the new Unfair Contract Terms Laws. But let’s be realistic … because no penalties were attached, most businesses did not pay too much attention to the requirements for their contracts.

That needs to change, because the penalties are truly scary.

Here is a summary of the main components of the Unfair Contract Terms Laws, as they will be from 10 November 2023 (with the introduction of the penalties, noting that all other parts of the Laws are already in place). While the Laws also apply to consumer contracts, we only deal with small business contracts in this article.

Previous Laws

A term of a small business contract is void under the Unfair Contract Terms Law if:

there is a standard form contract; and
the term is unfair.

The Australian Consumer Law (ACL) contains laws to protect consumers and small businesses from unfair terms in standard form contracts (Current Unfair Contract Terms Laws).

There is no element requiring one party to have relied on the unfair term.

Small Business Contracts

A small business contract is a contract for a supply of goods or services, or a sale or grant of an interest in land, where:

at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 100 persons (up from 20 persons under the previous law); or
has a turnover for the last income year of less than $10 million.

Standard Form Contracts

Standard form contracts are contracts where there are limited opportunities for the consumer or small business to negotiate the terms of the contract and where one of the parties has all or most of the bargaining power relating to the transaction. The party rebutting an allegation that the contract is a standard form contract must prove that it is not (there is a positive presumption that the contract is a standard form contract).

A court must take the following characteristics into account in making its decision, including:

whether one of the parties has all or most of the bargaining power relating to the transaction;
whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
whether another party was given an effective opportunity to negotiate the terms of the contract; and
whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

In determining whether is a standard form contract a Court must consider whether a party has used the same or a similar contract before, and the number of times this has been done.

According to ASIC, a standard form contract is a pre-written contract offered by one party on a “take it or leave it” basis, without negotiation. It is commonly used in industries such as telecommunications, finance, domestic building, gyms, motor vehicle rentals, travel, and utilities for the supply of goods and services to consumers. In deciding whether a contract is a standard form contract, the court considers factors such as the bargaining power of the parties, whether the contract was prepared without discussion, whether the other party had an opportunity to negotiate, and whether the terms consider the specific characteristics of the other party or the transaction.

Is a term unfair?

According to ASIC, the unfair contract terms laws protect consumers and small businesses from unfair terms in standard form contracts. An unfair term is one that gives a significant advantage to one party, is not necessary to protect the advantaged party’s legitimate interests, and would cause harm, whether financial or otherwise, to the disadvantaged party if enforced. Some examples of potentially unfair terms, as outlined by ASIC, include terms that allow one party to avoid or limit their responsibilities, unilaterally end the contract, penalise the other party for breaking or terminating the contract, or change the terms without agreement.

Under the Current Unfair Contract Terms Laws, a term 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.

In determining whether a term of a contract is unfair, a court may take into account such matters as it thinks relevant, but must take into account:

the extent to which the term is transparent; and
the contract as a whole.

There are a number of factors to consider when deciding whether a term is potentially unfair. The fairness of a term must be considered in the context of the contract as a whole.

The following are examples of the kinds of terms of a consumer contract or small business contract that may be unfair:

a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
a term that limits, or has the effect of limiting, one party’s right to sue another party;
a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; and
a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.

To which contracts will the new Laws apply?

The amendments to penalise unfair contract terms in standard form contracts with consumers or small businesses:

will apply to new standard form contracts made on or after the Commencement Date;
will apply where an existing standard form contract (before the Commencement Date) is renewed on or after the Commencement Date – from the date on which the renewal takes effect;
will apply to a term of a standard form contract that is varied after the Commencement Date
- from the date that the variation takes effect, but will only apply to that varied term as if the contract (as varied) had been made on the date of variation; and
will not apply to existing standard form contracts made before the Commencement Date.

Exceptions to Unfair Contract Terms Law (Exclusion of certain contracts)

According to ASIC, the unfair contract terms law does not apply to terms that are specifically required or permitted by another law, terms that define the price to be paid, terms that define the product or service being supplied, company constitutions, and commercial contracts for shipping goods by sea. These exceptions ensure that certain terms necessary for the contract’s operation are not subject to the unfair contract terms regime.

The unfair contract terms provisions do not apply to certain categories of contracts. These include:

the operating rules of licensed financial markets such as ASX Limited;
the operating rules of licensed clearing and settlement facilities;
real time gross settlement systems approved as payment and settlement systems by the RBA;
certain life insurance contracts; and
contracts connected with financial markets.

Will the amendments apply to contractors and subcontractors?

Note: The new Laws may capture contractors and large subcontractors where small companies acting as clients fit within the definition of small business. For example, a mining JV company contracting with a large contractor who provides its own standard terms and conditions. This effectively switches around the penalties, which may then apply to the contractor or subcontractor!

The contractor and subcontractor may also be caught if it puts forward an unfair term for inclusion in the client’s standard form contract! (An unintended consequence perhaps, but one to watch out for).

Penalties under the new Laws

Under the new Laws, unfair contract terms will be subject to penalties.

The new maximum financial penalties that may be imposed on the party who submitted each unfair contract term from 10 November 2023 are the greatest of:

$50,000,000;
3 x 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.

Multiple contract terms that contravene the legislation may lead to multiple instances of the party incurring a penalty.

Note – per term, not per contract. So penalties could potentially be astronomical (eg minimum of $50 million x 10 unfair terms!!!)

Either party can take action in court to allege that a term contravenes the Act. The ACCC or ASIC may also may also commence an action against a party to enforce the requirements of the Act.

Summary of Unfair Contract Terms Amendments

The amendments are as follows:

Current Law	New Law
Unfair contract terms are void	A person is prohibited from entering into, applying or relying on (or purporting to apply or rely on) a unfair contract term. Each unfair term contained in a contract is considered a separate contravention.
No equivalent section	A pecuniary penalty may be imposed if a person proposes, applies, relies, or purports to apply or rely, on a UCT amounting to: for a body corporate – the greater of (i) $50 million, (ii) three times the value of the benefit of the UCT or (iii) 10% off annual turnover during the preceding 12-month period; or for an individual – $2,500,000.
The Court may make orders: where a person has suffered, or is likely to suffer, loss or damage because of an UCT; and/or to void, void ab initio, vary or refuse to enforce part or all of the relevant contract (or collateral arrangement).	In addition to the current laws, the Court may make orders it considers appropriate to prevent or reduce loss or damage that has, or may be, caused by the UCT, including to existing contracts that contain the same or similar terms.
The Court may injunct 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 current injunction powers, the Court may injunct a person from: entering future contracts that contain the same or a substantially similar term; and/or applying or relying on a term in any existing contract with the same or a substantially similar term, whether or not that contract is before the Court.
No equivalent section	Unless a party proves otherwise, a contract term will be presumed unfair if the same or a substantially similar term has been deemed unfair in another proceeding in similar circumstances (e.g. proposed by the same entity or in the same industry).
‘Small business’ threshold is: fewer than 20 employees; and either: upfront price payable under the contract is less than $300,000; or $1 million if the contract is longer than 12 months.	‘Small business’ threshold is: fewer than 100 employees; or annual turnover of less than $10 million.
In determining whether a contract is a ‘standard form contract’, the Court must take into account a number of matters including: whether one party was required to reject or accept the terms of the contract in the form it was presented; or was given an effective opportunity to negotiate the terms of the contract.	In addition to current matters, the Court must consider whether a party has used the same or a similar contract before, and the number of times this has been done. The Court must not consider: whether a party had an opportunity to negotiate minor or insubstantial changes; whether a party had an opportunity to select a term from a range of options; or the extent to which a party to another contract or proposed contract was given an effective opportunity to negotiate terms of the other contract or proposed contract.
The law refers to non-party consumers.	Applies to both ‘non-party consumers’ and ‘non-party small businesses’.

Things to consider

Our recommendations

consider whether any of your customers or suppliers fall within the broader threshold for “small business”;
assess which standard form contracts you currently use in your business (including your Purchase Order);
engage an experienced Commercial Lawyer to undertake a review to identify any potentially “unfair” contract terms, and amend these before 10 November 2023; and
consider whether you are a contractor or a large subcontractor who provides its own standard terms or is able to insert your business terms into the client’s standard terms, as you may be cause by the Act amendments.
put in place a process of assessment before any contract entered into before 10 November 2023 is renewed or varied, as any unfair terms in these documents will need to be considered and revised as well.
For contractors and large subcontractors, In respect of clauses they often put forward to clients, eg “Business Integrity”, “Cybersecurity”, check whether this is likely to constitute an unfair term.
Hold multiple training sessions over the next 12 months and beyond, particularly to inform about possible ways your company could breach the Act (for example, your business could contravene the Act even if standard form contracts are negotiated, simply by proposing an unfair term).

Get a Commercial Lawyer to review any “standard terms” now – including your Purchase Order.

Check out other terms that are likely to be unfair and see other ways we suggest taking action in our post on making sure your business is protected from the Unfair Contract Terms November 2023.

Your Lawyer will need to advise you whether any terms are likely to be considered “unfair” – you should amend these clauses so there is less chance of them being found unfair.

Make sure you use a Lawyer who has undertaken this review and analysis before, and has experience in Contracting.

Rachelle Hare has advised on this issue a number of times and has helped her clients ensure their suite of documents are less likely to contravene the Act

Conclusion

The changes to the unfair contract terms regime are significant and will have a substantial impact on businesses in Australia from 10 November 2023. It is crucial for businesses to understand these changes and review their contracts to ensure they are compliant.

Failure to do so could result in substantial penalties.

Businesses should seek legal advice to ensure they understand the changes and their contracts are compliant.

Resources from government agencies such as the ACCC and ASIC, as well as legal advice from law firms such as Blaze Business & Legal, are available to help businesses navigate these changes and ensure their contracts are less likely to be deemed “unfair”.

Guide to the Unfair Contract Terms

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