Is Your Business Prepared For Changes To The Unfair Contract Terms Regime?

The Competition and Consumer Act 2010 (Cth) (“the CCA”) voids the operation of contractual terms that are deemed to be unfair by reference to standards set out in sections 24 – 25 of Schedule 2 of the CCA (with Schedule 2 of the CCA being referred to as the Australian Consumer Law).

From 10 November 2023, changes to the unfair contract terms regime (“the Regime”) under the CCA will come into effect. The changes mean that the Regime will apply to more businesses. Additionally, increased penalties will apply for breaches of the Regime.

This article focuses on the changes to the CCA that will broaden the application of the Regime. First, let’s look at some key concepts.

 

Unfair terms

If a contract is caught by the Regime, and it contains an unfair term, the unfair term will be void and have no effect.

A term will be unfair it:

• 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 is unfair, the Court may consider any factors it considers relevant but must consider:

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

A term will be considered transparent if it is:

• expressed in reasonably plain language;
• legible;
• presented clearly; and
• readily available to any party affected by the term.

 The CCA sets out non-exhaustive examples of what kind of terms may be considered unfair. In practice, some of the most common terms that fall foul of the Regime are those that:

• Provide for the automatic renewal of an agreement.
• Allow one party to vary the contract without agreement from the other party.
• Contain limitation of liability or indemnity clauses that are heavily weighted in favour of one party.
• Provide one party with excessive power to terminate the contract.

The meaning “unfair” remains unchanged under amendments to the CCA.

However, there are changes that mean the Regime will now apply to a broader range of contracts and businesses.

 

After 10 November 2023

The Regime applies to “consumer contracts” and “small business contracts” that are also considered “standard form contracts” under the CCA.

Small business contracts

Before 10 November 2023, a contract is a small business contract if (among other things) it was entered into a time when at least one party to the contract is a business employing fewer than 20 people.

From 10 November 2023, a contract is a small business contract if (among other things) it:

• Has 100 or fewer employees; or
• Has less than $10 million in annual turnover.

The effect of the above change is that more small businesses will be covered by the protections (and penalties) imposed by the Regime.

Standard form contract

A standard form contract is one that is prepared on a ‘take it or leave it’ basis. That is, a contract that is pre-prepared and not shaped pursuant to negotiations between the parties. Examples of standard form contracts may include contracts for telecommunications services, gym memberships, insurances or subscription based services.

Currently, the CCA provides that the Court must consider the following matters in deciding whether a contract is a standard form contract:

• 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 (other than the terms referred to in section 26(1)) in the form in which they were presented;
• whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1);
•  whether the terms of the contract … take into account the specific characteristics of another party or the particular transaction;
• any other matter prescribed by the regulations.

From 10 November 2023, the CCA will provide certain matters that the Court must not consider in deciding whether a contract is a standard form contract. Courts will not be able to consider:

1. whether a party had the opportunity to negotiate minor changes
2. whether a party had the opportunity to select a term from a range of pre-determined options provided by the party that prepared the contract.
3. whether the party that prepared the contract let a third party negotiate the terms of a different contract.

The above limitations mean that a broader range of contracts may be considered “standard form contracts” from 10 November 2023.

 

Takeaways

From 10 November 2023, the Regime is being amended such that far more contracts and businesses will be subject to the protections and penalties of the Regime.

Unfair contractual terms may result in contracts not operating as intended, and penalties being imposed.