ACCC 2022 In Review | Unfair contract terms
The amending legislation implementing the long-awaited reforms to Australia’s unfair contract terms laws (UCT laws) was finally passed by the Federal Government in November 2022, with the amendments effective from 9 November 2023. This change follows years of advocacy by the ACCC, which claimed that the existing unfair contract terms regime did not provide a strong enough deterrent for businesses whom the ACCC found were continuing to use and rely on unfair contract terms in their standard form contracts.
The reforms to the UCT laws occurred at the end of a year in which the ACCC prosecuted several businesses under the existing UCT laws regime. These prosecutions provide useful guidance to businesses regarding the kinds of terms that may be ‘unfair’.
What are the changes to the UCT laws?
The existing UCT law, contained in the ACL and the ASIC Act have been in place since July 2010 for consumer contracts and November 2016 for small business contracts. Under the existing laws, applicants can seek declarations from the courts that terms in standard form (‘take it or leave it’) contracts are void and unenforceable.
The amending legislation overhauls the existing unfair contract terms regimes in both acts, by substantially expanding their application to a wider range of contracts, introducing financial penalties and giving courts greater flexibility in terms of remedies. The changes to the UCT laws – which take effect from 9 November 2023 – are extensive. Businesses will need to be across how the changes to the laws impact their standard contracts, contract terms and customer engagement processes. Businesses need to take particular note of the following changes.
The reforms to the UCT laws now make it an offence to enter into a standard form consumer or small business contract that contains an unfair term and also an offence to seek to rely on an unfair term in a standard form consumer or small business contract. A business may breach these laws multiple times in a single contract as each individual unfair term contained in a contract is considered a separate contravention. A business can also breach these laws multiple times in the same contract or even in the same unfair term of the contract if they apply or rely on that term on multiple occasions.
The changes to the UCT laws significantly expand the class of standard form contracts that will fall within the regime – with a far wider definition for ‘small business’ and a broader consideration of what may be a ‘standard form contract’. As to the meaning of small business, the thresholds have been increased to include:
- a business that has fewer than 100 employees (previously 20), or
- has a turnover for the last income year of less than $10,000,000
Importantly, the contract value threshold has been removed entirely and will mean that many more small businesses will have the protection of the UCT laws regime.
The amending legislation also provides clarity for the factors that may be taken into account by a court when determining whether a contract with a small business is a standard form contract. When determining whether a party was able to genuinely negotiate a contract, a court is to disregard instances where a party has negotiated minor or insubstantial changes to the terms of a contract. A party’s ability to select from a pre-determined range of terms within a contract is also to be disregarded as evidence that an effective opportunity to negotiate is provided to that party. The court is also to disregard that a party to another similar contract has been given an effective opportunity to negotiate the terms of that contract.
This clarifies that even if a small subset of consumers or small businesses are able to negotiate the terms of a contract that is issued to a broader group of consumers or small businesses, the court is not to take this into consideration when determining whether the contract issued to the broader group is a standard form contract.
Introduction of pecuniary penalties
The introduction of the ability of a court to order payment of a substantial pecuniary penalty for the inclusion or reliance on an unfair contract term is a significant change. Currently, the courts are limited to declaring an ‘unfair contract term’ void and unenforceable. Each contravention of the UCT laws will be subject to the penalty regime which applies to other contraventions of the ACL.
|OVERVIEW OF CHANGES|
|Expansion of the offence|
|Expanded application of the UCT regime to a broader range of contracts|
|Introduction of pecuniary penalties for contravention of the UCT laws|
What the changes mean for business
It is recognised that the current UCT laws have in recent years, delivered improved protections for consumers and small businesses and there have been several prosecutions of businesses that have included unfair contract terms in their contracts. However, the ACCC has continually voiced its concern that the imbalance of bargaining power remains a live issue for consumer and small business contracting, and that the UCT laws did not provide a strong enough deterrence. The introduction of financial penalties and the availability of a wide range of remedies should provide a strong incentive for businesses to address compliance with the UCT laws. Given the expanded definition of a ‘small business’ contract means that approximately 99% of Australian businesses will be afforded the benefit of the unfair contract terms protections, we firmly believe that all businesses must take action now to prepare for the commencement of the changes to the UCT laws following the 12-month ‘grace’ period.
We recommend that all businesses take a proactive approach and revisit their suite of standard contracts (including supply agreements, trading terms and conditions, online sales terms etc), to identify those contracts that may fall within the extended class of ‘standard form’ small business contracts. A thorough review of all identified standard form contracts will be required to identify any contract terms that pose a risk of being ‘unfair’. Each term will need to be assessed, balancing any perceived imbalance of the term against what may be reasonably necessary to protect legitimate interests. Appropriate action to address any identified ‘unfairness’ will be required – this may include deletion of the term or suitable amendments to the term. For further information, see Substantial changes to the Unfair Contract Terms regime, Time running out on unfair terms? Bank on it, and Grappling B2B unfair contract terms laws.
|The UCT laws provide that a contract term is an ‘unfair’ term where:|
Ultimately whether a particular term is ‘unfair’ will need to be assessed on a case-by-case basis. There is no ‘shopping list’ of terms that are deemed to be ‘unfair’ contract terms. But by way of example (following legal commentary and recent ACCC investigations and prosecutions), the kinds of terms that may be unfair, include terms that:
- enable one party (but not another) to avoid or limit their obligations under the contract
- enable one party (but not another) to terminate the contract
- penalise one party (but not another) for breaching the contract
- enable one party (but not another) to vary the terms of the contract
- include automatic ‘roll-over’ clauses
- impose liquidated damages or penalties
- provide a broad unilateral indemnity
- seek to impose a cap a limitation on liability
Key enforcement activity
There has only been a handful of prosecutions since the unfair contracts regime was first introduced. However, in 2022 we saw two prosecutions under the UCT laws, which provide useful guidance as to the kinds of terms that may be unfair. These cases take on greater significance given the amendments to the UCT laws which commence in November 2023, where substantial penalties could have also been imposed for the same conduct.
38 unfair terms
In August 2022, the Federal Court of Australia handed down judgment in ACCC v Fujifilm Business Innovation Australia Pty Ltd in proceedings brought by the ACCC alleging 38 terms used by Fujifilm Business Innovation Australia Pty Ltd (Fujifilm), in several of its standard-form small business contracts, were ‘unfair’ and therefore unlawful. You can read our earlier article on these proceedings here.
Fujifilm had used the terms across a variety of their standard form contracts for a range of their products, such as software licences, support services and rental agreements. Fuji’s contract terms came to the ACCC’s attention via complaints from small businesses, including a complaint from the Australian Small Business and Family Enterprise Ombudsman, concerning standard form contracts used across the printing industry more generally.
The unfair contract terms are examined in the below table.
|Automatic renewal terms||The contract automatically renewed for a further term unless the customer gave notice to cancel the contract within a period before the end of the contract term, but there was no requirement on Fujifilm to notify the customer of the impending automatic renewal.|
|Unilateral variation||Fujifilm had the right to unilaterally vary all or some of the charges payable by the customer by notifying the customer of the varied charge. In some cases the words “acting reasonably” were inserted, but this did not negate the underlying unfairness of the unilateral right to vary charges.|
|Unfair payment terms||The customer was required to pay Fujifilm for software licensed pursuant to the contract, irrespective of whether Fujifilm had delivered the software.|
Incorporation of terms of supplementary documents
|The contract incorporated additional terms of supplementary documents by reference to them only (which were difficult for the customer to locate or identify) and which Fujifilm could unliterally vary with no obligation to give notice of the variation to the customer.|
|Unfair right to suspend||The contract allowed Fujifilm to suspend the services where the customer breached a term of the contract, but also required the customer to pay for the suspended services.|
|Disproportionate termination rights||Fujifilm could terminate the contract in far wider range of circumstances than those circumstances (if any) where the customer could terminate the contract.|
|Termination payments||The customer was required to pay extensive exit fees if the contract was terminated (including certain charges which Fujifilm could set unilaterally) and customer prepayments were forfeited.|
|One side force majeure||Fujifilm was not liable to the customer for any delay or non-performance arising from a defined force majeure event (the definition of which includes actions by third party suppliers), but there was no equivalent protection for the customer.|
|Limitation of liability||Fujifilm was only obliged to use reasonable endeavours to deliver the software/equipment and then its liability for delay was limited for any delay in supplying or delivering it to the extent permitted by law, in circumstances where the customer had no right to be excused from paying charges to Fujifilm during the period of the delay.|
|Cap on liability||There was significant cap, reduction or limitation on Fujifilm’s total liability to the customer and exclusion of consequential loss in circumstances where the customer’s liability had no limit (and in fact, had to pay termination payments).|
|Broad indemnity||There was a broad customer indemnity, where the customer was required to indemnify Fujifilm for loss or damage to the products with exclusions only for limited wear and tear and anything directly attributable to Fujifilm’s negligence, therefore requiring the customer to indemnify Fujifilm for damage caused by third parties or damaged caused accidentally or indirectly by Fujifilm.|
|Unfair warranty||The customer had to warrant that it had read each document forming part of the contract (including supplemental documents which may not have been provided) and warrant that it entered into the contract solely on the contents of the contract, therefore purporting to exclude any liability on the part of Fuji for pre-contractual representations.|
The Court ordered Fujifilm to stop enforcing the unfair terms and restrained it from relying on similar terms in future. Under the current regime, Fujifilm was also required to publish notices on its website explaining that the terms were declared void and unenforceable, implement a compliance program for employees involved in drafting, negotiating and enforcing contracts, and pay $250,000 towards the ACCC’s costs.
Significantly, if Fujifilm was prosecuted after 9 November 2023 for the same conduct, it could have faced maximum penalties of up to $50 million for each unfair term – a staggering theoretical penalty of $1.9 billion. Of course, while $1.9 billion would have been the theoretical maximum penalty, the reality is that the Court would likely have reduced the penalty to something far less than that amount by applying the ’totality principle‘ and the ’French Factors‘. Nonetheless, the Fujifilm decision should be a wake-up call for all businesses using standard form contracting to take the unfair contract regime seriously.
ACCC Deputy Chair Mr Mick Keogh commented that,
“We took this court action because Fuji’s unfair contract terms allowed this large company to leverage the significant power imbalance between it and small business customers to impose unnecessary and unjustifiable terms on these businesses,”
In September 2022, following an ACCC investigation, gaming services provider Maxgaming Qld Pty Ltd (Maxgaming), a wholly-owned subsidiary of Tabcorp Holdings, provided a court-enforceable undertaking to amend potentially unfair contract terms in its standard form contacts with small business gaming venues (including sports clubs, pubs and casinos). The terms included in the Maxgaming standard form contracts which were considered unfair included:
- terms providing for automatic term roll over the contract without notice to the customer and the renewed term were for long periods of time (eg up to 6 years)
- terms allowing Maxgaming to increase the fees payable if equipment required upgrading without the customer’s consent
- terms excluding Maxgaming from liability for negligent or wilful acts.
Maxgaming provided a court-enforceable undertaking to:
- amend potentially unfair contract terms in its standard form contracts with small business gaming venues by contacting existing customers.
- not include those terms/similar terms in future small business contracts
- implement a compliance program (i.e. staff training and an independent review)
It was also reported that Maxgaming rectified their auto-renewal issue by notifying customers before the renewal and limiting the renewal term to one year.
Given the ACCC’s long-standing advocacy for UCT reforms,
its active stance in this space (including recently with Fujifilm and
Maxgaming) and its announcement that the protection of small businesses is one
of its 2022-23 official priorities, businesses should expect that the ACCC will
be particularly active in enforcing and prosecuting businesses for the use of
UCTs. Businesses have until November 2023 to review and update their standard
form contracts to ensure they are more evenly balanced. If they fail to do so, they
may find themselves in a similar position to Fujifilm but with the added bonus
of a likely penalty in the millions of dollars.
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