The 50 Million Dollar Incentive to Ensure Fair Contract Terms

The 50 Million Dollar Incentive to Ensure Fair Contract Terms

The goal of the recently introduced Treasury Law Amendments (More Competition, Better Prices) Act 2022 (“The Act”) is to discourage businesses from breaking consumer and competition laws by expanding the definition of unfair contract terms (or “UCT”) and imposing maximum penalties.

The Act significantly broadens the scope of the UCT regime as it expands the small business threshold and introduces serious penalties for all competition and consumer law contraventions inclusive of $50 million for a body corporate and $2.5 million for individuals. 

When is a term unfair for the unfair contract term regime?

A court will apply the three-limbed test for unfairness and hold a consumer contract is unfair if it:

• Causes a significant imbalance in the parties’ rights and obligations arising under the contract;
• Is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the terms of the contract; and
• Would cause detriment to a party if applied or relied upon.

Significant Imbalance:

A factual assessment will be conducted on the available facts required when determining whether a consumer contract’s provision will result in a significant imbalance. This must be demonstrated, on the balance of probability, that the terms of the contract will cause this imbalance.

Not reasonably necessary:

The party benefitted by the term must prove that the term was reasonably necessary and that its legitimate interest is sufficiently compelling to overcome any detriment caused to the consumer. When the advantaged party provides evidence for such, they may look at the business’s expenses, structure, requirements to mitigate risks, or specific industry standards of the company.

Detriment:

The court considers whether the term causes any detriment to the consumer, such as financial detriment, delay, or anguish. The claimant must show that there is more than just a hypothetical case in which they would be harmed.  

What is a standard form contract?

Although Australian Consumer Law does not specially define the term ‘standard form’ there are a range of frameworks that the court uses to determine whether a contract is a standard form. This is inclusive of:

• One party possesses the bargaining power;
• One party prepares the contract without a discussion between the parties;
• The other party must accept or reject the terms on a ‘take it or leave it basis’; and
• The other party does not have an adequate opportunity to negotiate the terms of the contract.

The court will also consider whether the party that prepared the contract has made another contract that is the same or very similar to the number of times this has been done. The change to the law will also make clear that a contract may be a standard form despite:

• The other party having an opportunity to negotiate the terms of the contract that are minor or insubstantial;
• The other party can select a term from a range of options determined by the party that prepared the contract; or
• The party that prepared the contract lets a third party negotiate the terms of a different contract.

Treasury Laws Amendment (More Competition, Better Prices) Act 2022

Under The Act, the UCT protections apply to a small business contract if one party is a business that:

• Employs less than 100 people; or
• Has a turnover for the last income year of less than $10,000,000.

The Act came into effect on 9 November 2023 and therefore will only apply to:

• Contracts entered into at or after the commencement date;
• Existing contracts renewed at or after the commencement date; and
• Terms varied at or after the commencement date.

The key terms of The Act are as follows:

• A person cannot propose, apply, rely, or purport on a UCT;
• A court may impose a financial penalty where a UCT is prevalent;
• Where a contract has numerous UCT, each unfair term in the contract may be considered a separate breach;
• The maximum penalty for a body corporate, the greater of is $50 Million, 3 times the value of the benefit of the UCT or 30% of the adjusted turnover during the breach turnover period;
• The maximum penalty for an individual is $2.5 million; and
• The courts may make orders to prevent a party from using the same or similar unfair terms.

Unfair contract terms law not applying:

An UCT does not apply to the following:

• Terms specifically permitted by law;
• Terms which set out the upfront price to be paid;
• Terms that define the main subject matter of the contract;
• Company constitutions; and
• Commercial contracts for the shipping of goods by sea.

Examples of unfair contract terms

UCT may include the following which enables one party and not the other to:

• Avoid or limit their obligations under the contract;
• Terminate the contract;
• Penalise the other part for breaching or terminating the contract; and
• Varying the terms of the contract.

An example may be the following:

Business A provides a standard form 2-year contract for their gym membership which allows them to change their fees during these 2 years without the members’ consent and not allowing any early termination options. This term could be deemed unfair as they do not allow the consumer a fair choice in response to their fee increase. If the contract allowed for termination without a penalty, it is likely that this term would not be deemed unfair.

Fuji Case

In the Australian Competition and Consumer Commission v Fuji Xerox Australia Pty Ltd (2022), the court deemed the following terms as unfair terms:

Term	Explanation
Automatic Renewal	A provision that allows for a contract to renew itself automatically unless the consumer takes affirmative action to cancel it within several days before the end of the contract.
Disproportionate Termination	Allowing one party to terminate the contract in a significantly wider range of circumstances than the other.
End of Contract Period	referred to clauses that apply to financing leases, according to which the customer does not acquire title to the equipment even after paying the residual value at the end of the lease term.
Extraneous Document	Where a customer is required to comply with other documents not set out in the contract and which can be amended without notice to the customer.
Irrevocable Offer	Not all irrevocable offers are UCT, however, when only one party is bound to the contract for an indefinite time while the other party is under no corresponding obligation, this may be deemed unfair.
Liability Limitation	Significantly limits the liability of one party, while not providing the corresponding rights to the other.
Non-Reciprocal Obligation	Prohibit the customer from assigning its rights without the other parties’ consent, however, allow the other party to assign its rights without the customer’s consent.
Termination Payment	The ability to impose or retain charges on termination of the contract that are not based on the loss sustained.
Unfair Payment	Requiring one party to pay for service under the contract, irrespective of whether the other party delivered the services.
Unilateral Variation	Permit one party to unilaterally vary terms of the contract such as price changes and party rights and obligations.

How we can help you:

Our committed staff at Elamine Lawyers can help you with contract preparation and evaluation to make sure your conditions adhere to Australian Consumer Law. Contact us today at admin@elaminelaw.com.au or call us at 03 8400 0100.