New unfair contract term prohibitions and penalties introduced

Background

Following the passing of the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (the Bill) last week, businesses engaging in anti-competitive conduct will incur harsher penalties under the Competition and Consumer Act 2010 (Cth) (CCA).

The legislative amendments also seek to deter the use of unfair contract terms by introducing new prohibitions and civil penalties to the Australian Consumer Law (ACL) and the Australian Securities Investments Commission Act 2001 (Cth) (ASIC Act).

Commencement

The new unfair contract term regime will come into effect 12 months after the Bill receives Royal Assent and will apply to all contracts entered into, varied or renewed following its commencement.

The new penalties for contraventions of the CCA will come into effect the day after the Bill receives Royal Assent.

Unfair contract terms

Expanded application

The new reforms will extend the reach of the current unfair contract regime by lowering thresholds, meaning more contracts will be encompassed by the legislation.

Parties seeking relief under the ACL will be entitled to do so provided one party to the contract is a business employing fewer than 100 persons or had a turnover of less than $10 million in the preceding income year.  

Where unfair contract terms relate to financial products or services, remedies may be accessed under the ASIC Act provided the value of the contract does not exceed $5 million and one of the parties to the contract is a business employing fewer than 100 persons or had a turnover of less than $10 million in the preceding income year.

New prohibitions

Under the previous regime, affected parties were only able to recover compensation for loss or damage suffered as a result of unfair contract terms and seek declarations that the terms were void. The new regime creates express prohibitions against the proposal, inclusion or reliance upon unfair contract terms and empowers courts to impose significant financial penalties for these contraventions. Demonstrating the seriousness with which unfair contract terms are now regarded, businesses contravening the prohibition face maximum penalties consistent with those applying to other major breaches of the CCA.

The courts will also have the power to grant injunctions restraining contravening parties from relying upon similar terms in other standard form contracts or including similar terms in future contracts.

Greater clarification

The new unfair contract term provisions provide clarification as to the circumstances in which a standard form contract may exist. The new provisions clarify that standard form contracts may still exist in circumstances where parties have had the opportunity to negotiate minor or insubstantial changes to a contract, select a term from a range of options offered by another party, or a party to a similar contract or proposed contract has had the opportunity to negotiate terms.   

The new amendments will also require courts to consider the use of contracts containing the same or similar terms when determining whether a contract is a standard form contract.

Exclusion of certain contracts

The legislative amendments have clarified that unfair contract term provisions will not apply to contracts relating to or incorporating listing rules of licensed financial markets or clearing and settlement facilities, nor contracts that relate to or incorporate rules governing the operation of a payment or settlement system approved under the Payment Systems and Netting Act 1998.

The Bill has also clarified that particular life insurance contracts will be excluded.

Increased penalties

The Bill also increases the maximum penalties applicable for breaches of the key prohibitions of the CCA and of the ACL.

The maximum penalties are now the greater of $50 million (up from $10 million currently), three times the value of the benefit obtained while engaging in anti-competitive conduct, or 30% (up from 10% currently) of the body corporate’s adjusted turnover during the breach period. For an individual, the penalty is now up to $2.5 million (up from $500,000 currently).

Under the ASIC Act, businesses will incur a maximum penalty of the greatest of 50,000 penalty units or three times the value of the benefit received as a result of the breach or 10% of the body corporate’s annual turnover if the value of the benefit received cannot be quantified. Individuals involved in these breaches will expose themselves to a maximum penalty of the greater of 5,000 penalty units or three times the benefit received as a result of the contravention.

It is worth noting in the cases of breaches of the unfair contract term prohibition that each unfair contract term will amount to its own breach, which will attract a separate penalty. This means that businesses may attract multiple penalties in connection with a single contract.

Implications

Business have been aware for some time now of the need to avoid unfair terms in standard form contracts, but previously the implications for including such terms were limited. As a result, many standard form contracts continue to be used by Australian businesses.

These reforms create a more pressing need for businesses to assess the compliance of standard form contracts with the new unfair contract term regime in order to avoid exposure to harsh penalties. The increased penalties for anti-competitive conduct should also serve as a reminder of the importance