Tougher Penalties for Unfair Contract Terms

DATE PUBLISHED: March 13, 2024

key takeaways

It is a contravention of the Australian Consumer Law (ACL) to include, apply, or rely on an unfair contract term (UCT) in standard form consumer contracts and business contracts – from late last year, what constitutes a UCT has been broadened, and the penalties for any such contravention have been increased.
The maximum penalty will be the greater of $50 million, 3x the value of the benefit obtained due to breach, and 30% of adjusted gross turnover during the period of breach – per contravention.
Businesses that deal with standard form contracts (such as standard terms and conditions, memberships, off the plan property contracts and other contracts) are exposed and well and truly in the firing line.

To know more about the new UCT regime, see the first issue in our series here, and also our discussion on how these laws relate to property contracts here.

What is a Term 'Unfair'

What makes a term unfair is an established area of law, that has existed for some time. The amendments to the UCT laws increase the scope of contracts these established unfairness principals apply to, and the penalties imposed.

Although the ACL includes a “grey list” of examples of the kinds of terms that may be unfair, there is no definitive answer about what constitutes an unfair term. Generally, where a term in a contract is oppressive on one party or their rights, to the benefit of the other party, the term will be considered unfair.

There are times that a business may seek to include or rely upon a term that operates in their favour to protect their best interests. However, this imbalance must be necessary to protect the trader’s legitimate interests.

What type of contract does the UCT regime apply to?

Businesses who rely on standard form ‘consumer contracts’ and ‘small business contracts’ must remain diligent so that their contracts do not fall afoul of the new UCT regime.

Standard Form Contracts

A document will be presumed by a court to be a standard form contract, until proven otherwise. Relevant matters the Court will consider include whether one party to the contract prepared the document and whether that party has entered multiple other documents on the same or substantially similar terms. When determining whether a given contract is a standard form contract, a Court need not consider whether the other party had the opportunity to negotiate minor changes or had the opportunity to select from a range of options.

A standard form contracts is a:

consumer contract if it is for the supply of goods and services predominantly for personal, domestic, or household use; and 
small business contract if it is for the supply of goods and services where at least one party is a small business (i.e., a business that employs fewer than 100 people or generates less than $10 million a year).

Examples

Standard form Consumer Contracts and Small Business Contracts (be that in a consumer or small business setting) include:

contracts for the supply of a utilities (such as water, electricity, or internet);
mobile phone and telecommunication plans;
software licenses;
gym memberships; and
other online contracts where the user must ‘accept’ terms and conditions.

Where might you find UCTs in your documents?

Type of Clause	Matters to Consider*
Automatic Renewal Terms These are clauses that allow the contract to be renewed automatically or at the discretion of the trader, unless written notice is given to terminate the agreement by the customer. These terms can have the effect of the customer being signed onto another contract without their knowledge, there is a risk that such clauses are unfair.	It is sometimes in the parties’ best interest for a contract to automatically renew to continue a mutually beneficial contractual relationship. However, if the party cannot cancel the contract easily following the renewal or if the renewal period is excessively long, the clause is at risk of being unfair. It is important to consider whether the automatic renewal clauses should be limited by allowing for easy cancellation or shorter renewal periods.
Unilateral Termination These are clauses that provide the trader with more rights to terminate than the customer. This could be where the business is solely able to terminate be it for convenience, or upon breach or default. It may also be unfair where the customer may be penalised for electing to terminate the contract, where the trader is not similarly penalised.	Businesses should consider whether their unilateral termination rights go beyond what is reasonably necessary to protect their legitimate interests, to the detriment of the customer. Businesses should limit their termination rights to only when specific criteria are met and not on a general basis. Businesses should also consider when it is reasonably necessary to penalise the customer for breach of contract (and for what types of breach).
Unilateral Variation Terms These are clauses that allow the trader to vary the terms of the contract without giving the other party the right to terminate. This often takes the form of a mechanism for the variation of fees. Such terms are at risk of being unfair as the customer can be subject to fees that they did not know they agreed to.	It is sometimes necessary for a trader to have flexibility to make variations. However, clauses can be considered unfair if they allow variations at the whim of the traders that are likely to be to the detriment of the customer, without providing the customer compensation or an opportunity to terminate the contract. As such, if unilateral variation clauses are to be included, they should be limited (including by limiting the frequency and extent of such variations allowed). If the variation clause relates to a variation of fees, the trader should consider using an objective mechanism.
Assignment of the Contract These are clauses that allow the trader to transfer their rights, obligations, and responsibilities to another party. These are at risk of being unfair because the customer chose to contract with the trader, and not to another party, particularly where this right is unilateral or can be exercised without the counterparty’s consent.	Businesses should consider whether these clauses are reasonably necessary to protect their legitimate interest. These clauses are generally considered unfair because the rights the customer has to the business can be passed to an unidentified non-party and this creates uncertainty. If these clauses are to be used, they should attempt to identify the other party to which assignment may be made and the business should ensure the customer is aware of the effect of this clause.

*the above examples are illustrative only and do not constitute legal advice as to whether such clauses are unfair contract terms. Such determination is to be made on a case-by-case basis, based on the full context of the document in question.

what should businesses do?

Businesses must constantly revisit their standard documents and the terms upon which they offer their goods or services, and:

consider whether any documents include a powerful consequence upon or right against a consumer or small business;
if any documents contain any such consequence or right, consider whether the interest it protects is in the business’ legitimate best interest and is proportionate;
ensure the terms offered (especially those that may imposes powerful consequences or rights) are drafted transparently, expressed in reasonably plain language, legible, presented clearly, and readily available to any party affected by the term;
consult with legal advisers when drafting terms, and when any issues arise; and
generally, exercise caution when contracting with an individual or small business (noting that Courts will assume contracts are ‘standard form’ until proven otherwise).

how can mcw Assist?

Businesses who are entering into new standard form contracts, or renewing or varying existing standard form contracts should consider reviewing the terms to ensure they avoid the significant pecuniary penalties (which came into effect last year).

McInnes Wilson Lawyers can assist by:

reviewing contracts to provide an industry-specific report as to UCT regime risks for their existing or proposed contracts;
providing the advantage of our UCT focused suite of contract templates and advice templates to allow businesses to have confidence in their contracting;
confirming whether a contract is subject to the UCT regime under the ACL;
reviewing the terms of a contract and determining whether any of its terms are unfair or likely to be unfair if raised by a counterpart to a transaction;
amending or redrafting the terms of contracts to minimise exposure to the UCT regime and its significant penalties; and
responding to or defending claims from the regulator or disgruntled clients that assert your contracts breach the UCT regime.

For more information about how McInnes Wilson Lawyers can assist with the above, please contact either Chris Davis on (07) 3014 6530 or cdavis@mcw.com.au or George Londy on (07) 3292 5720 or glondy@mcw.com.au.