Big penalties and wider application to commence 9 November 2023

In late 2022 the Australian Parliament passed the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 to expand the protection to small businesses under the Australian Consumer Law against unfair terms in standard form small business contracts. The number of contracts caught by the unfair contract terms provisions will significantly increase as a result of adoption of an amended definition of ‘small business contract’ which now captures contracts of any value and term provided one of the parties has fewer than 100 employees and/or an annual turnover during the previous financial year of less than AU$10 million.

Under the new regime, the Australian Consumer Law will prohibit companies and individuals from including, applying or relying on an unfair contract term in a standard form small business contract. Currently, where a standard form small business contract contains an unfair term, no penalty may be imposed, but the term may be determined by a court to be void and unenforceable. Under the new provisions significant civil penalties may be imposed. An individual that contravenes the provisions may receive a maximum penalty of AU$2.5 million. The maximum penalty for corporations is the greater of:

• AU$50 million;
• Three times the benefit obtained and reasonably attributed to the conduct; or
• If a court cannot determine the value of the benefit obtained – 30% of the Australian group turnover during the breach turnover period (being the greater of 12 months or the period of the contravention).

Each breach can attract a penalty. Meaning the above penalties may be multiplied if a contract contains multiple unfair contract terms and/or is relied on repeatedly.
These new unfair contract terms provisions come into full effect on 9 November 2023, providing businesses with a 12-month period from when the bill was passed to update their standard form contracts to ensure compliance and avoid the significant penalties which are now associated with non-compliance.

Once the prohibitions on unfair contract terms come into effect both new contracts and renewals of existing contracts will be captured by the regime. Further, the amendments will also apply to any terms of existing contracts which are varied on or after the above date.
Businesses should amend contract templates to avoid terms that are likely to be regarded as unfair, which terms may include those which:

• permit one party but not another to avoid or limit the performance of the contract;
• permit one party but not another to terminate;
• penalise one party but not another for a breach or termination;
• permit one party but not another to vary the terms of a contract;
• permit one party but not another to renew or not renew a contract;
• permit one party to vary the upfront price payable without the right of the other party to terminate;
• permit one party to unilaterally vary the characteristics of the goods or services to be supplied under the contract; or
• permit one party to unilaterally determine whether the contract has been breached, or to interpret its meaning.

This list of potentially unfair terms is included in the legislation.

Case law and commentary from the regulator has identified that clauses including the following may be unfair:

• A clause which permits a party to unilaterally vary related policies, manuals or other documents which are binding under the terms of the contract. Providing adequate notice of such variations and limiting variations to those which are reasonable may overcome unfairness. A further measure that can be taken is to permit the other party to terminate if it does not accept the variation.
• Liquidated damages which exceed a genuine estimate of losses relating to the breach or conduct.
• Unreasonably broad restraints of trade.
• Broad unilateral indemnity provisions. Limiting the obligation to indemnify to circumstances in which the loss resulted from the act or omission of the indemnifying party may overcome unfairness. An alternative amendment would be to exclude the indemnity to the extent that the loss resulted from the indemnified party’s negligence or was caused or contributed to by the indemnified party.
• Unilateral exclusion/limitation of liability clauses.
• An unrestricted right for one party to claim costs

However, whether a clause is unfair (and appropriate amendments to address this) will need to be assessed in the relevant circumstances.

Material negotiation of the terms of a contract may provide a basis for argument that it is not standard form such that the above provisions do not apply. However, further amendments to the ACL clarify that a contract may still be standard form where a party is given the opportunity to:

• negotiate changes to terms of the contract that are minor or insubstantial in effect;
• select a term from a range of options determined by another party; and/or
• negotiate terms of another contract or proposed contract.

We strongly recommend all businesses who use template contracts review the same before 9 November 2023.