New unfair contract terms legislation passed

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New unfair contract terms legislation passed

New unfair contract terms legislation passed

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February 2, 2023

Key Points

The new law is stated to apply to terms that are not just relied on, but which are ‘proposed’ by a party – this indicates that if an unfair contract term is in existence in a contract, then a penalty may apply.
Under the ASIC Act, the definition of ‘small business’ has been expanded and the maximum value of the upfront price to qualify as a ‘small business contract’ has been raised from AU$1 million to AU$5 million. Under the Australian Consumer Law, the contract value threshold has been removed entirely.
A court can make orders with respect to the whole contract and not just the void term if necessary to prevent loss or damage.

Background

On 9 November 2022, the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth), imposing penalties for unfair contract terms, received royal assent.

The new legislation amends the Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investment Commission Act 2001 (Cth) to impose penalties for proposing or relying on unfair contract terms, meaning that the importance of ensuring standard form contracts do not contain any unfair contract terms, especially loan and security documents, has increased significantly.

The amendments also expand the contracts that are caught by the unfair contract terms legislation.

View the legislation.
View the explanatory memorandum.

Impact: What you need to know or do

The rationale for the change and introduction of penalties is that the existing legislation has not deterred the use of unfair contract terms with such terms remaining prevalent.
Below is a summary of the new law (as introduced to parliament) and the law that is currently in force:

New Law	Current Law
Introduction of penalties A pecuniary penalty may be imposed if a person proposes, applies, relies or purports to apply or rely on, an unfair contract term.	No equivalent.
Change to definition of ‘small business’ Under the ASIC Act (relevant to loan contracts), the protections will apply to a small business contract if the upfront price payable does not exceed AU$5,000,000, and one party to the contract employs fewer than 100 persons or has a turnover for the last income year of less than AU$10,000,000. For other goods and services contracts the Australian Consumer Law (ACL), the unfair contract terms (UCT) protections will apply to a small business contract if one party to the contract is a business that employs fewer than 100 persons or has a turnover for the last income year of less than AU$10,000,000. Under both, part-time employees are to be counted as an appropriate fraction of a full time equivalent employee.	The unfair contract terms protections apply to a small business contract if one party to the contract is a business that employs fewer than 20 persons and the upfront price payable under the contract does not exceed one of the two alternative monetary thresholds provided for in the law.
Powers of the court The court can make orders with respect to a whole contract or collateral arrangement, including to void, vary or refuse to enforce the contract, if this is appropriate to prevent loss or damage that is likely to be caused. The new provisions do not require a court to consider that they will redress actual loss or damage. The court can also make orders, on the application of the regulator (ege.g. ASIC), preventing a party from using a term that is the same or substantially similar in effect to a term that has been declared as unfair. This will also mandate exclusion of the term from any future standard form small business or consumer contracts involving that party. Additionally, the court can make orders, on the application of the regulator, to prevent or reduce loss or damage which is likely to be caused to any person by a term that is the same or substantially the same in effect to a term that has been declared unfair.	Where a court determines a term in a standard form contract to be unfair, it is automatically void. The court can also make orders for the whole or any part of a contract or collateral arrangement between the respondent and another person, including that the contract is void. These orders can be made by an affected party or by application of the regulator on behalf of either a party or a non party. Such orders can only be made when a person or class of persons has suffered, or is likely to suffer, loss or damage.
Additional injunctive powers In addition to the current injunction powers, the court can make an injunction restraining a person from: entering into any future contract that contains a term that is the same or similar in effect to a term that has been declared an unfair contract term; or applying, or relying on, a term in any existing contract that is the same or similar in effect to a term that has been declared unfair, whether or not that contract is before the court.	Among other powers, the court can make an injunction in such terms as it considers appropriate restraining a party from applying, relying on, or purporting to apply or rely on, a term of a contract that has been declared an unfair term.
Determining what is a ‘standard form contract’ – repeated use of the contract In addition to the current matters, when determining whether a contract is a standard form contract, a court must also take into account whether one of the parties has used the same or a similar contract before.	In determining whether a contract is a standard form contract, a court must take into account a number of matters.
Determining what is a ‘standard form contract’ – minor amendments and options A contract may be determined to be a standard form contract despite there being an opportunity for: a party to negotiate changes to contract terms that are minor or insubstantial in effect; a party to select a term from a range of options determined by another party; or a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.	In determining whether a contract is a standard form contract, a court must take into account a number of matters, including whether one party was required to reject or accept the terms of a contract in the form in which they were presented and whether another party was given an effective opportunity to negotiate the terms of the contract.
Terms included by operation of law In addition to the current exemptions to the unfair contract terms provisions (namely terms that define the main subject matter of the contract, or terms that set the upfront price), contractual provisions that are taken to be included in a contract by operation of a Commonwealth, state or territory law are also excluded to the extent that the relevant law mandates their inclusion. Additionally, a clause of a contract that results in other contract terms being included in a contract because of the operation of another law of the Commonwealth or a state or territory, is exempt from the unfair contract terms provisions insofar as the provisions would prevent the other terms from being included or operating as required by the law.	Contractual provisions that are required or expressly permitted by a law of the Commonwealth, or of a state or territory, are exempt from the unfair contract terms regime.
Clarification of ‘non-party’ The law refers to “non-party” to clarify that the law applies to both consumers and small businesses.	The law refers to “non-party consumers” (despite applying to both consumers and small businesses).
Exclusion of certain contracts Certain categories of contracts are excluded from the operation of the unfair contract terms provisions. These include: the operating rules of licensed financial markets such as ASX Limited; the operating rules of licensed clearing and settlement facilities; and real time gross settlement systems approved as payment and settlement systems by the RBA. Certain life insurance contracts and contracts connected with financial markets are also excluded from the scope of the provisions in order to ensure positive consumer outcomes.	No equivalent.

Next Steps

Although there is a 12-month transition period from the date of Royal Assent for the new unfair contract term provisions, we suggest that you act now to avoid a last minute rush.

Dentons can help you to understand your new obligations under the amended legislation and update your loan and security documents accordingly.