Staying on track: a refresher on the unfair contract terms regime

Article by Nadia Maynard, Senior Associate

On 9 November 2023, changes were introduced to the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (ASIC Act). This article provides a refresher on the reforms to the ACL and ASIC Act in relation to the Unfair Contract Terms regime and the implications individuals and businesses may face, if any contraventions occur. 

What are unfair contract terms?

A term of a consumer contract or business contract is considered unfair in circumstances where:

1. it causes a significant imbalance in the parties’ rights and obligations;
2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. it would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.

Furthermore, section 25 of the ACL and section 12BH of the ASIC Act provide examples of terms that may be considered unfair contract terms.

Who is affected?

The unfair contracts regime applies to:

1. Standard form contracts – these are contracts that have been prepared by one party to the contract in advance which contain standard terms. The other party has an extremely limited, or no ability to negotiate changes to the terms of the standard contract.
2. Small business contracts –
   1. these are contracts that are for the supply of goods or services, or the sale or grant of an interest in land, to an individual for personal, domestic, household use or consumption.
   1. Under the ACL, they are contracts from a business which employs less than 20 people (including casual employees employed on a regular or systematic basis) and has annual turnover of less than $10,000,000;
   1. Under the ASIC Act, a contract is considered a small business contract where:
      1. a party employs less than 100 people at the time the contract is signed (including casual employees employed on a regular or systematic basis), or has a turnover for the last income year of less than $10,000,000; and
   1.  the upfront price payable under the contract does not exceed $5,000,000.

What happens if a contract contains unfair contract terms?

The ACL and the ASIC Act impose significant penalties if a person proposes, applies, relies upon or purports to apply or rely upon, an unfair contract term.

For companies, the penalties per breach are:

1. Under the ACL, the greatest of:
   1. $50 million;
   1. three times the value of the benefit obtained from the conduct, if it can be determined; or
   1.  30% of the adjusted turnover during the breach period.
2. Under the ASIC Act, the greatest of:
   1. 50,000 penalty units;
   1. three times the benefit derived and detriment avoided; and
   1. 10% of the annual turnover for previous 12 months capped at 2.5m penalty units.

For individuals, the penalties per breach:

1. $2.5 million.

In addition to the above, the Court also has the following powers:

1. orders to void, vary or refuse to enforce part or all of the contract;
2. orders preventing the same or similar term being included in future standard form contracts;
3. provide injunctive relief to restrain:
   1. a party from applying, relying upon, or purporting to apply or rely upon, a term of the contract that is declared unfair; and
   1. a person from entering into any future contract or applying or relying upon a term of an existing contracts which includes terms that are the same or similar to a term that has been declared unfair.

Conclusion

All businesses and individuals must review and ensure that their standard form contracts, consumer contracts and small-business contracts do not contravene the ACL and ASIC Act.

We recommend that all individuals and corporations undertake contract review and retain expect legal advice on any potential unfair contract terms to minimise risk.