Massive contract changes to hit Australian businesses

There is a seismic shift in the law coming in November for many Australian businesses, affecting both business-to-consumer and business-to-business contracts, and businesses and other organisations that do not prepare for the law change in time will be at risk of massive potential fines.  

Adequately addressing the unfair contract terms regime, in light of the new penalties and greater scope of coverage, takes time, and those who haven’t reviewed or revisited their contract templates for compliance should do so urgently.  

Higher stakes for unfair contracts

Our team at Maddocks has been monitoring the various decisions on unfair contract terms to assist our clients to address the revised regime, and have become increasingly aware of the huge impact this will have on standard form agreements.  

Terms that many would see as quite ordinary, industry standard or otherwise fairly innocuous have been held to be unfair. Depending on the circumstances, provisions that are commonplace in template agreements – including automatic contract renewals; one party having the right to assign the contract; or force majeure protections for one party – can be held unfair. 

While unfair contract terms (UCTs) have been prohibited since 2010, the stakes have not really been that high – a term found to be unfair can be declared void and unenforceable. Following years of advocacy by the Australian Competition and Consumer Commission (ACCC), this is changing, and soon the stakes will be much higher.  

From November 9, 2023, it will be an offence to enter into a standard form consumer or small business contract that contains an unfair term, or to seek to rely on an unfair term in such a contract, with each contravention subject to a maximum penalty of $50 million; three times the value of the benefit obtained; or – if the court cannot determine the value of the benefit obtained – 30% of the adjusted turnover during the breach turnover period for the offence. 

Both the ACCC and the Australian Securities and Investments Commission (ASIC) have made UCTs an enforcement priority. The ACCC in particular has stated that it is more likely to take legal action in relation to an enforcement priority, and where the conduct is by a large or national trader, or has the potential to result in competitive harm or substantial detriment to consumers or small businesses. 

Businesses should therefore expect the regulators – the ACCC in particular – will be active in enforcing and prosecuting the use of unfair contract terms. We anticipate they will be looking for a few high-profile ‘scalps’ as examples to the market. 

Changes apply to standard form contracts with small businesses – that’s 98.3% of Australian businesses

In 2016, the UCT protections, under the Australian Consumer Law, were extended to small businesses. We suspect some in the business community may assume they apply only to contracts with consumers or that only a small proportion of their customers or other contractual counter-parties will be “small businesses”.  

In fact, the expansion of scope under the new regime will apply to standard form contracts with businesses that have fewer than 100 employees and/or a turnover for the last income year of less than $10 million – a test that catches at least 98.3% of Australian businesses. This means most Australian businesses will be at risk of the new penalties.  

For an organisation captured under the regime, it will apply to any standard form contract it uses, regardless of whether it is a supplier or a customer. It does not just apply in situations where the organisation has bargaining power in its favour – it can apply if the counter-party is the local subsidiary of a global giant, for example. And since only one party to the contract needs to be a small business, small businesses themselves will not be exempt from the exercise of updating their standard form contracts by November 9. 

Those using standard form contracts are facing a perfect storm at the moment. When the regulators take businesses to court, the terms are almost invariably found to be unfair – in the cases we have reviewed, around 95% of the terms considered by the court were held to be unfair. This high strike rate may be partly because organisations taken to court under the current regime often don’t contest the regulator’s submissions. This is presumably because they know the current regime doesn’t really have teeth and, for example, don’t argue that the term is reasonably necessary to protect their legitimate interests (an exclusion of a term being unfair).

So, while the test for whether a term is unfair is not changing, the test has been applied fairly strictly and a vast array of terms have been found to be unfair by the courts – all at a time when organisations are about to be exposed to enormous penalties.  

For Australian branches of global organisations, the regime can be particularly hard to navigate. While there is protection against UCTs in other jurisdictions including the UK, the EU, New Zealand and South Korea, these protections carry no financial penalties or a fraction of those possible in Australia and apply to consumers only or a much narrower range of small businesses. As such, it may take some effort to get HQ to fully appreciate the risks here and work through making changes to a global set of terms or preparing a separate version for Australia.  

Along with carrying out numerous reviews of standard form agreements for clients, we have also developed an online tool that will soon be available on Maddocks Digital which organisations can use to carry out a threshold assessment of whether the unfair contract terms regime applies to their contracts.  

In conducting reviews of standard form contracts in readiness for the new regime – in many cases where these have previously been reviewed for unfair terms under the current regime – almost all require changes to address the unfair contract terms regime. Australian business needs to be on notice. 

Brendan Tomlinson is a partner at the law firm Maddocks.