Recent reform to unfair contract terms laws
Overview of the reform
Amendments to the Australian Consumer Law (ACL), contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) were passed in October 2022 to the effect that making a standard form contract which contains unfair terms, or relying on an unfair term is now illegal.
Prior to these changes coming into force on 9 November 2023, trying to enforce unfair contract terms in standard form contracts did not contravene the ACL and the Courts could not impose penalties on individuals or business who sought to do so. The Court only had the power to make a determination that a contract term was unfair and as such, declare the term to be void.
Today, use and reliance on unfair contract terms is not only illegal, but the Court now has the power to impose substantial penalties on small businesses and individuals that do not adhere to the changes from 9 November 2023.
A key driver behind these amendments was rising concern over the significant volume of standard form contracts in the market drafted strongly in favour of the offering party, especially where that party already holds far greater bargaining power. These types of contracts are frequently offered on a ‘take it or leave it’ basis, leaving consumers and small businesses with little to no room to negotiate any unfair terms which may have been included.
Affected contracts
Subject to a few qualifications, these changes will affect:
standard form contracts (noting that a contract may be considered ‘standard form’ even where there was an opportunity to negotiate terms);
contracts for the supply of goods or services (including financial products or services under the ASIC Act) or for the sale or grant of an interest in land;
contracts for a consumer or small business; and
contracts for financial products and services.
It is important to note that the relevant clause of the ACL (section 23) which voids unfair terms in standard form consumer contracts also operates in respect to contracts entered into outside of Australia and irrespective of whether the contract is predominantly performed outside of Australia, provided that one of the parties is incorporated in, or carrying on business in, Australia. This was confirmed by the High Court of Australia in the December 2023 case of Karpik v Carnival plc [2023] HCA 39 (Ruby Princess Case).
What are Unfair Contract Terms?
Under the ACL, a term may be deemed unfair if:
causes a significant imbalance in the parties' rights and obligations under the contract;
is not reasonably necessary to protect the legitimate interests of the benefitting party; and
reliance on the term would cause financial or other detriment to the other party if relied on.
In the Ruby Princess Case, the High Court handed down a decision that a clause which prevented passengers from participating in ‘class action’ legal proceedings against the cruise operator was unfair given:
the one-way nature of the term which operated to restrict the rights of the passengers, but in no way limit the rights of the cruise operator, coupled with the already significant power imbalance in favour of the cruise operator;
the cruise operator could not rebut the presumption that the term was necessary to protect its legitimate business interests; and
the practical effect of the clause undoubtedly caused some level of detriment to passengers whose capacity to exercise their right to commence proceedings against the cruise operator was restricted to doing so in their individual capacity only; a plight which may well not be economical viable when weighed against the cost of the ticket paid by that passenger; and
that the clause was not clearly presented or readily available to the consumer. Instead, various steps were required to enable the passenger to view the terms, including receiving a booking conformation email, clicking links, navigating webpages and deciphering the terms and conditions relevant to the passenger’s booking from a list of multiple other standard form contracts utilized by the cruise operator.
Other non-exhaustive examples of a terms which may be deemed unfair includes terms which:
permit only one party renew, vary or terminate the contract;
permit one party vary the upfront price payable under the contract without the right of the other party to terminate the contract;
permit one party to unilaterally vary the characteristics of the goods/services to be supplied;
limit one party’s vicarious liability for its agents; and
limit one party’s right to sue another party.
However, each term will be considered by the Court on its own merits taking into account the relevant circumstances.
Although the reforms do not alter the pre-existing test for whether a contract term is unfair, the reforms do allow the imposition of substantial penalties for contravention.
What are the penalties?
The ASIC Act and the ACL set out differing penalties for individuals and corporations. Individuals under the ACL may be fined up to $2.5 million per contravention, while the maximum penalty faced by corporations under the ACL is the greater of $50 million or three times the value of the benefit obtained (if determinable) per contravention.
If the above amount cannot be determined, the maximum penalty will be 30% of the corporation’s “adjusted turnover” during the “breach turnover period”, which will be a period of at least 12 months, per contravention.
What you need to know
Standard form contracts entered into, or renewed, after 9 November 2023 will be affected. Additionally, any amendments made to existing contracts, including the addition of a new term, or variation to an existing term after 9 November 2023 will trigger the law to apply to the entirety of the contract, not just the amendments. Attempts to apply or rely on an unfair contract term after 9 November 2023 may result in penalties.
If you are a small business, you should:
arrange for a review of existing contracts to identify and remove any unfair contract terms; and
ensure that unfair terms are not included or proposed in new contracts.
How can we help you?
To discuss how we can assist you, please contact our office to arrange a consultation with a member of our corporate team on 03 9645 9500.
