Legal Insights

Unfair contract terms

• 07 February 2024 • 5 min read

The amending legislation implementing the long-awaited reforms to Australia’s UCT laws commenced November 2023. The amendments to the UCT laws follow years of advocacy by the ACCC for a more robust regime designed to provide a strong deterrent for businesses using and relying on unfair contract terms in their standard form contracts. The legislation substantially expands the application of the UCT laws, giving protections to an extended definition of who is a ‘small business’ and applying to a wider range of standard form contracts. Financial penalties for including or relying on an unfair contract term now apply and the courts have greater flexibility in ordering remedies to address contravening terms.

2023 enforcement priorities

While the UCT laws were an enforcement and compliance priority for the ACCC in 2023, there were only two notable ACCC actions during the year. Firstly, the ACCC investigated several suppliers in the fertiliser industry, who reached an agreement with the ACCC to amend their standard form contracts with small business farmers to remove potentially unfair contract terms used in a way that could disadvantage farmers. Secondly, the ACCC investigated the residential home building company Fowler Homes Pty Ltd which agreed to provide an undertaking to not enforce an unfair ‘non-disparagement clause’ and indemnity included in its standard home building contract. These two actions followed the ACCC proceedings in 2022 against Fuji Film and Max Gaming, provide guidance for the kinds of terms that may be considered to be ‘unfair’ within the ambit of the UCT laws.

Major developments and activities

The most important development in 2023 was the commencement of the long-awaited reforms to the UCT laws which commenced on 9 December 2023.

New offences

It is now an offence to enter into a standard form consumer or small business contract that contains an unfair term or to seek to rely on an unfair term in either form of contract. A business may commit an offence multiple times in a single contract as each unfair term contained in a contract is considered a separate contravention. A business can also commit an offence 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.

"There was previously little motivation for businesses to comply with the law, despite the ACCC’s compliance and enforcement actions. We strongly urge businesses to review their contracts now to ensure they comply."

ACCC Deputy Chair, Mick Keogh

Extended application

The class of standard form contracts that will fall within the small business contract regime has been significantly expanded.

The definition for who is a ‘small business’ who obtains the benefit of the protections has been expanded by increasing the thresholds to capture 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

The kinds of contracts that fall within the regime have also been expanded by removing the contract value threshold entirely.

The reforms also provide 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 not evidence that they were afforded an effective opportunity to negotiate that contract. 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. These changes clarify that even if a small subset of consumers or small businesses can negotiate the terms of a contract that is issued to a broader group of consumers or small businesses, the court is not to consider this when determining whether the contract issued to the broader group is a standard form contract. Under these key reforms, many more small businesses that have entered into a wider range of contracts will have the protection of the UCT laws regime.

"The changes to the unfair contract terms laws should motivate businesses to take steps to ensure their standard form contracts are fair, including by removing or amending concerning terms."

ACCC Deputy Chair, Mick Keogh

Introduction of pecuniary penalties

The introduction by Parliament 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. Prior to the commencement of the reforms, the courts were limited to declaring an ‘unfair contract term’ void and unenforceable. Now each contravention of the UCT laws will be subject to the penalty regime which applies to other contraventions of the ACL.

Looking ahead

We predict an increase in the ACCC’s actions throughout 2024 and beyond by it taking full advantage of the expanded application of the UCT laws and the increased enforcement rights and remedies. The 12-month window between enactment of the reforms and commencement of the reforms on 9 December 2023, provided businesses ample opportunity to review and update their standard form contracts to ensure they are more evenly balanced without ‘unfair’ terms. Any business that continues to include or rely on unfair contract terms in its standard form contracts is exposed to a risk of ACCC enforcement action and could find themselves at the receiving end of penalties in the millions of dollars.