Unfair Contract Terms — Law Squared

Unfair Contract Terms (UCT) have come under attack from the Australian Competition and Consumer Commission (ACCC) and the new penalties (for both individuals and businesses) are significant.

Mark Your Diary

Under the changes, which come into effect on 9 November 2023, corporations will face heavy penalties of up to $50 million, whilst individuals may face penalties of up to $2.5 million. Additionally, courts will have greater powers to enforce breaches of the UCT regime and corporations could face significant monetary and reputational damage because of these breaches.

Law Squared commercial lawyer, Grace Beaumont, recommends all businesses undertake a contract review ahead of the incoming changes: “If it's been a couple of years since you last reviewed your Agreements, it’s likely you could have some sneaky terms that no longer reflect best practice and may even be unlawful.”

Beware the Usual Suspects

Grace notes that while UCTs continue to catch out businesses of all sizes, SaaS and other tech companies with subscription arrangements or automatic renewal clauses in their T&Cs, run at higher risk of being found unfair. Other ‘usual suspects’ include indemnity and liability clauses and unilateral variation clauses.

As a starting point, Grace recommends businesses ask:

1. Are your terms difficult to read? Could your average customer decipher them?

2. Do they require customers to pay to terminate? Can you prove that the charge only covers your actual losses, or is there a hidden profit margin?

3. Do you have the right to change your prices without providing the customer with an exit?

“If you answered YES to any of these questions, you may have unlawful terms lurking that may not only result in penalties, but may be declared void and therefore, not carry the legal force you expect,” says Grace.

Frequently Asked Questions – Unfair Contract Terms

To help businesses prepare, Law Squared’s commercial team have prepared a series of FAQs to help decipher if unfair terms are lurking in your agreements.

Where do Unfair Contract Terms lurk?

The UCT regime falls under the Australian Consumer Law (ACL), which is part of the Competition and Consumer Act 2010 (CCA).

A contract is captured by the UCT provisions if:

1. It’s a Standard Form Contract

2. It’s a Consumer Contract

3. It’s a Small Business Contract

4. It’s not an excluded contract

What is a standard form contract?

To determine if your contract is a standard form contract, ask:

1. Have you used the same or a substantially similar contract before?

2. Does your contract require the other party to ‘accept’ or ‘reject’ the terms as they are?

If you answered YES to any of the above, your contract is likely a standard form contract.

What is a consumer contract?

The ACL sets out that a consumer contract is a contract for the supply of:

(a) goods or services; OR

(b) a 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.

What is a small business contract?

Under the changes, a small business contract is:

(a) a contract for a supply of goods or services, or grant of an interest in land; and

(b) at the time the contract is entered into, at least one party to the contract is a business that employs less than 100 people or has an annual turnover of less than $10 million.

It is important to note here that some contracts governed by the ASIC Act may still be captured under the UCT regime, such as those where:

(a) at the time the contract is entered into, at least one party to the contract is a business that employs less than 100 people or has an annual turnover of less than $10 million; and

(b) the upfront price payable under the contract is less than $5 million.

There are, however, some exclusions for contracts governed by the ASIC Act so it’s best to get in touch if you have any concerns.

What makes a term ‘unfair’?

It can be difficult to ascertain whether a term is unfair at the outset. A court may look at:

1. Does the term cause a ‘significant imbalance’ in the rights and obligations of the parties?

2. Is the term ‘reasonably necessary’ to protect the interests of the parties?

3. Would the term cause detriment to a party, if relied upon?

In doing so, the court will have regard to:

- how ‘transparent’ the term is; and

- the contract as a whole.

Transparency and ‘Contract as a Whole’

To determine if the term is transparent, we should consider:

- the legibility of the term;

- whether the term is presented clearly in the contract; and

- whether it is expressed in reasonably plain language.

This means asking yourself, “does this make sense?” Importantly, just because a term does not make sense to the reader, it does not automatically make it unfair. Doing a ‘sense-check’ of the term within the context of the contract as a whole, can be a useful tool in making this assessment.

What are examples of Unfair Contract Terms?

Section 25 of the Australian Consumer Law (ACL) provides guidance on examples of UCT, including:

- 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.

What are the potential penalties?

Under the changes, a party will be in breach of the UCT laws if it includes an unfair term in its standard-form consumer or small business contracts. In addition to the extended court powers to (amongst other things) void and prevent both terms and entire contracts being enforceable, potential civil penalties are increased to:

(a) for companies, the greater of:

(i) $50 million;

(ii) three times the value of the benefit the company would receive for reliance on the unfair term (if able to be determined);

(iii) 30% of the company’s turnover during the offence period.

(b) for individuals, $2.5 million.

Now is a good time to check standard form agreements and as always, if you need help reviewing and updating your contracts or other commercial contracts, please reach out to the Law Squared commercial team here.

ACCC crackdown on Unfair Contract Terms