It’s been a year since the strengthened unfair contract terms (UCT) regime came into effect on 9 November 2023, so what have we learned? This article sets out the practical and legal realities and risks faced by businesses since the fortified UCT regime came into effect; the uncertainties which remain under the law; the surprising commentary resulting from enforcement by the regulators; and the key lessons for businesses to take away from recent cases.

Key Takeaways

• The vast majority (over 90%) of Australian businesses fall into the category under the Australian Unfair Contract Terms laws of being a ‘small business’ – that is, they employ fewer than 100 people or have an annual turnover of less than AU$10 million (around USD$6.6 million). If a consumer or a ‘small business’, the consumer or small business is entitled to protection from unfair contract terms in standard form agreements it agrees with others. However, the small business also may be subject to the risk of having unfair contract terms in its own standard form agreements – whether those agreements are with a large or small business or a consumer. In short, Australia’s unfair contract terms regime create legal risks for almost all who carry on business in Australia – whether an Australian company or a foreign company.
• Before the change in law in 2023, the risk was that an unfair term would be void and unenforceable. Now, additionally, substantial penalties apply for using or proposing unfair contract terms in standard form agreements with consumers or small businesses.
• Much of the legal risk arises because the Australian laws are not clear - key concepts, such as what is a standard form agreement or what is or is not an unfair contract term requires complex contextual legal analysis to assess – creating legal costs and business uncertainty. The cases emerging in Australian courts in the last year since the fortified regime for unfair contract terms came into effect reinforce that factual backgrounds, the context of the contract as a whole and the effect of other applicable laws are relevant to the complex analysis as to whether a term is unfair.

1. The Road to UCT Reform

April 2010: Australia’s UCT laws first came into effect in 2010 under the Australian Consumer Law in Schedule 2 to the Competition and Consumer Act 2010 (Cth) (ACL) with mirror provisions enacted in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

August 2022: The existing UCT laws at the time protected small businesses (employing up to 20 people) and contracts under a certain (relatively low) value as well as consumers. Contract terms found by a court to be UCTs were unenforceable although the companies that proposed them or relied on them did not face any penalties. The Australian Federal Government announced its intention to shield small businesses from exploitation by banning unfair contract terms and implementing penalties when such terms are discovered.

November 2022: The Australian Federal Government enacted the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) to attract protection for even more small businesses and a much beefed up enforcement regime including very large penalties for non-compliance.

November 2023: The new UCT laws took effect on 9 November 2023 – applying to standard form contracts entered into on or after that date – or where they were renewed or varied on or after that date.

2. What were the key changes under the strengthened UCT regime?

(a) More businesses are ‘small businesses’ entitled to protection from UCTs

The small businesses entitled to protection under the strengthened UCT regime from UCTs expanded to almost all businesses in Australia. This is because the eligibility threshold for protection previously applied to companies with fewer than 20 employees and this changed to applying to those companies with fewer than 100 employees or where they had an annual turnover of less than $10 million.

Due to this change, a vast majority of Australian businesses are small businesses for the purpose of the strengthened UCT regime. As at June 2024, it is estimated that 98% of Australian businesses have an annual turnover of less than AU$10 million.¹ Although data about the number of businesses with fewer than 100 employees is not available, it is estimated that 97.2% of businesses in Australia have fewer than 20 employees and only 0.2% of businesses in Australia have 200 or more employees.²

(b) Significant Penalties

Companies proposing unlawful unfair contract terms in their standard form agreements with consumers or small businesses run the risk now of maximum penalties for an individual of AU$2.5 million (around USD$1.65 million) or for a company of the greater of AU$50 million (around USD$33 million) or a formula calculated as “three times the value of the benefit …obtained directly or indirectly and that is reasonably attributable to the [unfair contract term]…where it can be determined” or 30 per cent of the company’s turnover.

Previously the key risk of an unfair contract term was it could be declared void and was unenforceable. Now additionally substantial penalties apply.

3. What has happened since the strengthened UCT regime started in 2023?

In the last year since the new laws came into effect, we have seen several key developments:

• Businesses structuring: At odds with the UCT policy aims are practical responses in some sectors to the new laws including businesses structuring to enable them to fall within the criteria for small businesses in order to avail themselves of the UCT regime – for example, some companies who may be part of very large corporate groups can take advantage of the UCT regime by contracting through small entities within the corporate group.
• Increased legal costs and red tape: The Australian Chamber of Commerce and Industry’s 2024 report on small business conditions noted that red tape is impacting small businesses’ profitability and that 82% of small businesses surveyed by them said it is having a major or at least moderate impact on their operations. Most small businesses said the impact of red tape is growing and has increased. Almost a third of their small business survey respondents reported that complying with contracts and legal expenses were difficult. Additionally, many businesses have invested substantial amounts on obtaining legal advice on the UCT laws. This is necessary for many as the UCT laws do not exactly or precisely set out many of the fundamental concepts of the regime. Expert contextual analysis of contracts is required to mitigate the substantial risks of non-compliance. Fundamental concepts lacking clarity in the regime include:

• what exactly is a standard form contract;
• what exactly is an unfair contract term;
• when is a potential UCT reasonable to include to protect legitimate interests;
• what is a legitimate interest.

• Regulatory enforcement: There has been enforcement by Australia’s regulators, the Australian Securities and Investment Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC). Some have resulted in surprising commentary (as well as cases in the last 12 months). By way of example, the December 2023 ACCC warning franchisors to remove unfair contract terms or risk legal action in their standard form franchise agreements. The ACCC cited in its report potential problems with every single one of the ten sampled franchise agreements reviewed by it for compliance.

4. Lessons from cases over the last year

Adding to the complexity have been the varied results of cases dealing with unfair contract terms in the last 12 months.

(a) Karpik v Carnival: a class action waiver clause was unfair and an exclusive jurisdiction clause may be unfair and the UCT regime has extra territorial reach beyond Australian businesses as well as to others carrying on business in Australia³

What happened?

Although the facts of the Karpik case predates the new UCT regime, the decision handed down after the new UCT regime came into effect clarified the far-reaching impact of the strengthened UCT regime. Karpik confirmed the extra territorial reach of the ACL.

Karpik concerns a class action case brought against Carnival Plc in connection to an outbreak of COVID-19 on the Ruby Princess cruise ship in March 2020. Class members outside Australia sought compensation for their loss and damage arising from Carnival’s breaches of the ACL.

Carnival sought to rely on a clause in its contracts with consumers outside Australia for the cruise which had sought to deny the rights of the consumer to participate in any class actions. Additionally, Carnival sought to rely on another clause which provided that any claims by the consumers had to be litigated exclusively in a US court.

The High Court of Australia found that the class action waiver clause was unfair as well as not being transparent in the manner in which it was presented to the consumer agreeing to the contract.

In relation to the exclusive jurisdiction clause, the Court noted that there were strong reasons not to enforce the clause but did not determine whether it was unfair.

(b) ASIC v PayPal – term denying compensation for wrong charges was unfair⁴

What happened?

ASIC brought proceedings against PayPal for including a term in its contracts which required businesses to notify PayPal of errors or discrepancies in PayPal’s charging of fees within a short period or the business was deemed to have accepted the charges as accurate.

By consent, the Federal Court of Australia found that the term was unfair – largely because it forced PayPal’s customer to have to continuously examine their account statements and monitor their account activity to identify wrong charges. The Court also considered the term was lacking transparency. As PayPal did not seek to rebut the presumption in the UCT regime that the term was not reasonably necessary to protect its legitimate interest, this concept of the UCT regime was not tested.

(c) ASIC v Auto & General Insurance – a term obliging an insured person to tell its insurer ‘anything’ not unfair⁵

What happened?

ASIC brought proceedings against Auto & General Insurance (A&G) for a term in its product disclosure statement which required the insured party to “tell us if anything changes while you’re insured with us”. ASIC alleged this was a broad unclear obligation about what changes should be notified in circumstances where the insured party may not be insured if they did not notify A&G.

The Federal Court of Australia did not consider the term a UCT – in part because the insurer was considered to have a legitimate business interest in being made aware of facts relevant to A&G’s willingness to accept the insurance risk but also (and critically) because of the effect of section 54 of the Insurance Contracts Act (which would ameliorate the effect of any breach of condition by the insured).

In April 2024, ASIC appealed the Court’s decision, challenging every key ruling of the Court, including the Court’s conclusions as to whether the terms were transparent. In its appeal, ASIC asserts that the Court erred in not finding other terms that protected A&G’s legitimate interest to the same extent. The appeal was heard by the Full Federal Court on 28 August 2024 with the decision reserved.

If ASIC’s appeal is successful, insurers will not be able to point to section 54 as an answer to what may be an unfair contract term. Additionally the potential impact of a successful appeal may be that it is unfair for a business to have two or more provisions in the same contract which protect the same legitimate interest – even if none of the terms themselves is unfair.

While we await the Full Federal Court’s decision, a key lesson from the Auto & General Insurance case is that context is key to assessing whether a term is an UCT.

(d) ASIC v HCF Life Insurance – a term requiring an insured party to notify unknown pre-existing conditions to insurer not unfair⁶

What happened?

On 28 October 2024, the Federal Court of Australia found that a ‘pre-existing condition’ term in certain HCF Life Insurance Company Pty Ltd (HCF Life) policies was liable to mislead the public but dismissed ASIC’s claim that this term was unfair.

The term in question purported to allow HCF Life to deny coverage if a customer did not disclose a pre-existing condition before entering the contract even if a diagnosis had not been made, suggesting that HCF Life could deny coverage even if the customer was not aware of the condition.

The Court in the HCF case did not seem to attach the same weight to section 54 of the ICA as the Court in the A&G case. However the A&G case illustrated the Court nevertheless had regard to the contract as a whole, with the Court in the A&G case construing the word “anything” to mean and be limited to changes to information about the insured’s home and contents which had been already disclosed by the insured prior to entering into contract – rather than any information whether or not relevant.

The Federal Court of Australia found that the clause was not an unfair contract term largely because of the ameliorative impact of section 47 of the Insurance Contracts Act 1984 (Cth) (ICA) - which provided that an insurer may not rely on an pre-existing condition exclusion where, at the time the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability). In short, the Court considered the context of the ICA meant that there was a significant lessening in the imbalance (which was in favour of HCF) in the rights of the parties because of the term being included.

5. So what’s next?

• The ACCC has stated that enforcing the UCT regime is a top enforcement priority – and so we expect to see more cases before the courts in the near future.
• The varied results in the court decisions over the last 12 months shows that there remain many aspects of the UCT regime which are uncertain.
• The present status is that:
  • the vast majority of Australian businesses and businesses who carry on a business in Australia (even if a foreign company and the contract is for outside Australia) are regulated by the UCT regime; and
  • unfair contract terms in small business contracts and consumer contracts are void and unenforceable and will attract substantial penalties and enforcement by Australia’s regulators.
• Many fundamental concepts of the UCT regime, particularly with respect to when a clause is reasonably necessary to protect legitimate interests remain unclear – creating business risk and uncertainty.
• This is an area where expert legal advice on contract terms is necessary and should be obtained. A watching brief should be maintained on the case developments and regulatory enforcement.

Dentons has a team of experts advising on Australia’s fiendishly difficult and complex unfair contract terms regime.

If you need assistance or advice on these areas, please contact any of Robyn Chatwood, Vanesa Gore, Elise Ivory, Vince Mascolo, Toby Blyth or your usual Dentons contact.

¹ Number of small businesses in Australia | ASBFEO

² Number of small businesses in Australia | ASBFEO

³ Karpik v Carnival plc [2023] HCA 39

⁴ ASIC v PayPal Australia Pty Limited [2024] FCA 762

⁵ ASIC v Auto & General Insurance Company Limited [2024] FCA 272

⁶ ASIC v HCF Life Insurance Company Pty Limited [2024] FCA 1240