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Antitrust / Competition

Australia: Unfair terms penalties countdown – From 9 November 2023 prohibitions for unfair contract terms commence

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In brief

From 9 November 2023, the unfair terms regime will change so that significant penalties may apply for breaches of the UCT regime. As a result, businesses need to look again at their standard terms for unfair terms risks.

The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (“Act“), which was passed in 2022, relevantly:

  • Introduced new civil penalty provisions prohibiting the use of and reliance on unfair contract terms (UCT’s) in standard form contracts (previously the impact was that the offending clauses were only rendered void, without penalty)
  • Increased the maximum penalties that may be awarded for breaches of the civil penalty provisions in Parts IV, IVBA, X and XICA of the Competition and Consumer Act 2010 (CCA) and under the Australian Consumer Law (ACL), including the UCT regime to the greater of:
    • AUD 50 million
    • If the court can determine the value of the benefit obtained — three times the value of that benefit
    • If the court cannot determine the value of the benefit obtained — 30% of the body corporate’s adjusted turnover during the breach turnover period for the offence, act or omission

So as to enable industry to make any necessary changes to the applicable standard form contracts, the changes to the UCT regime did not commence for a period of 12 months following the Act receiving Royal Assent. The amended UCT regime will apply to standard form contracts that are made or renewed at or after the commencement date or on 9 November 2023.

The increased pecuniary penalties for breaches of the ACL have applied since 10 November 2022.

This alert is an update to our earlier alert when the Bill was passed, providing an overview of the key changes and highlighting important considerations for businesses.

Key takeaways

Given the 9 November 2023 start of the UCT changes, business should be identifying all commercial partners who may fall within the new definitions of “small business” and also carefully reviewing its standard form contracts with small businesses and consumers for potential unfair terms. The risks of not doing so are obvious and very significant – we expect that the regulators will closely look at potential contraventions and will not hesitate to take action in appropriate cases given the year long period that businesses have had to prepare.

The review that must now be undertaken of standard form contracts will be significantly different to the review that businesses undertook when the UCT regime was originally introduced. This is because the risk analysis has fundamentally changed – it is no longer possible to leave a ‘borderline’ unfair term in a contract on the basis that if unfair it will only be void and unenforceable – now that same term if unfair will be illegal and will expose the relevant business to the risk of substantial penalties.

The significant increases in penalties for breaches of the consumer law and for anti-competitive conduct also greatly increase the risks to business. Whilst we do not anticipate that the courts will immediately impose penalties that are five times the current level, the new UCT regime will provide the courts substantial discretion to order very large penalties in the most serious of cases.  

The new UCT regime

Under the pre–November 2023 UCT regime, a term contained in a consumer contract or small business contract will be void (i.e., not binding on the parties) where the term is unfair and the contract is ‘standard form.’  No penalties applied. 

From November 2023, two new UCT prohibitions apply where a party:

  1. Proposes an unfair term in a standard form consumer or small business contract which the party has entered into
  2. Uses, applies, or relies on (or purports to use, apply to rely on), an unfair contract term in a standard form consumer or small business contract

A business may breach these prohibitions multiple times in relation to the same contract term. For example, a separate contravention will arise for each instance that a UCT is applied or relied on, and each UCT will be considered a separate contravention.

The terms “applies, or relies on” mean to give effect to, or seek to enforce, an unfair term of a contract. It will be possible for multiple contraventions to arise in relation to the same contract or unfair term of a contract if a party applies or relies on multiple unfair terms or an unfair term on multiple occasions.

Expanded ‘small business’ scope of the UCT regime

The application of the UCT regime will also be significantly expanded from November 2023, and will include standard form contracts where one party to the contract is a business that:

  • Employs fewer than 100 employees (increased from the current limit of 20 employees)
  • Has a turnover of less than AUD 10 million (in the last financial year)

These changes have removed the upfront contract value threshold, which can sometimes be difficult to determine.

Broader remedies

The current automatic voiding provisions continue to apply, but from November 2023, the new UCT regime will broaden the court’s powers to respond to breaches of the UCT regime.

These include:

  • The introduction of pecuniary penalties for breaches of the UCT regime. This will align the UCT regime with other contraventions of the ACL and the new maximum penalties set out above will apply.
  • Orders to void, vary or refuse to enforce part or all of a contract if the Court considers it appropriate to prevent or reduce loss or damage that may be caused from the contravention. This differs from the current test which requires that loss or damage has occurred or is likely to occur.
  • On application by the ACCC, orders relating to terms that are the same or substantially similar to a term that has been declared as unfair, can also apply to non-parties (both consumers and small businesses). For example, the Court may make orders preventing terms from being included in any future contracts, or may make orders to prevent or reduce loss or damage that may be caused by these terms, or prevent a person from including, applying or relying on these terms in other contracts captured by the UCT regime.

These remedies will significantly expand the scope of intervention available to Courts in relation to the UCT regime. The introduction of penalties is a very significant change to the current regime and, with the recent changes to the maximum penalties, means that there is now a risk of significant penalties being imposed for unfair contract terms in consumer or small business contracts.

Clarifying the UCT regime

The Act also includes the following changes to the UCT regime, clarifying various aspects of the existing regime:

  • Standard form contract. When determining whether a contract is “standard form”, the Courts will need to consider whether the party has used the same or a similar contract previously. This goes to the concept of repeat usage.
  • Effective opportunity to negotiate. When considering whether a party has had an effective opportunity to negotiate, the Court will disregard whether the party had an opportunity to negotiate minor or insubstantial changes to terms in the contract or was able to select a term from a range of pre-determined options, and the extent to which a party to a similar contract was given an effective opportunity to negotiate.
  • Minimum standards provisions excluded. The changes in law clarify that the UCT regime does not apply to certain terms that are read into a contract by operation of a Commonwealth, State or Territory law (for example, some tenancy protections may be implied by law).
  • Certain categories of contract will be excluded from the UCT regime under the ACL:
    • The operating rules of licensed financial markets
    • The operating rules of licensed clearing and settlement facilities
    • Certain life insurance contracts
    • Real time gross settlement systems approved as payment and settlement systems by the RBA

Similar obligations exist regarding unfair contract terms for certain financial products and services under the Australian Securities and Investments Commission Act 2001.

Application of the new UCT regime

As noted above, businesses were given 12 months to make any necessary changes with the amended UCT regime commencing on 9 November 2023. 

The new UCT regime will apply to:

  • New standard form contracts that are made at or after 9 November 2023
  • A renewed contract on and from the day on which the renewal takes effect
  • A term of a contract varied after 9 November 2023 (If there has not already been a renewal of the contract, the new regime will apply only to the term or terms that have been varied, on and from the day on which the variation takes effect, and as if the contract as varied had been made on the variation day.)

For advice and assistance in navigating these changes, please contact one of our experts.

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Lynsey Edgar is a partner in the Sydney dispute resolution team, whose practice focuses on competition and consumer law. She is global co-lead of the Firm's Competition Litigation Taskforce. Lynsey is recognised in Legal500 (Competition and Trade, Australia, 2022), where she is described by clients as having "high commercial acumen" and providing "clear and commercial merger control advice". Client feedback to Chambers & Partners states that Lynsey is "outstanding in her ability to advise on complex matters". Lynsey is a member of the Law Council of Australia's Competition and Consumer Committee, and has spoken widely on topics including compliance with competition law and responding to regulatory investigations.

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Jonathan Flintoft is a partner in the Sydney office of Baker McKenzie where he advises on intellectual property law (particularly brand protection and trade mark prosecution), commercial law and consumer law. He has almost 20 years of experience advising on the selection, registration and protection of trade marks in Australia and globally. Jonathan joined the Firm's London office in 1999 and relocated to Sydney in July 2005. He was appointed partner in 2015.

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Georgina Foster is a partner in Baker McKenzie's Sydney office and leads the Firm’s Australian competition practice.

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Helen Joyce is a partner in Baker McKenzie’s Dispute Resolution Practice Group in Melbourne. She joined the Firm in 2010 having spent the prior decade practising as a solicitor in London. Helen is recognised in the 2023 edition of Best Lawyers Australia for Competition Law and Litigation.

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Adrian Lawrence is the head of the Firm's Asia Pacific Technology, Media & Telecommunications Group. He is a partner in the Sydney office of Baker McKenzie where he advises on media, intellectual property and information technology, providing advice in relation to major issues relating to the online and offline media interests. He is recognised as a leading Australian media and telecommunications lawyer.

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Toby Patten is a partner in Baker McKenzie's Technology and Healthcare teams in Melbourne. He joined the Firm in March 2005.

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Anne has been with Baker McKenzie since 2001. Prior to that, she spent four years with the Australian Attorney-General's Department/Australian Government Solicitor mostly working on large IT projects. In her time at Baker McKenzie, Anne has spent 18 months working in London (2007-2008) and more recently three years working in Singapore (2017-2020). Anne is currently the Asia Pacific head of the International Commercial & Trade Group and global co-lead of the Firm's supply chain client solutions initiative.

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Simone Blackadder is a special counsel in the Media & Content team at Baker McKenzie, Sydney. Simone joined the Firm in 2010 and was admitted to practice in 2012. She now works primarily on litigious matters within the IT, communications, media and defamation fields.

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