New penalties and expansions for unfair contract terms in standard form contracts

Any businesses that supply goods or services to consumers or small businesses using standard form contracts should be aware of important changes coming to the current unfair contract terms regime.

A standard form contract is a contract that has been prepared by the business and issued to multiple customers on a “take it or leave it basis” with little room for negotiation.

On 9 November 2022, the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Act) received Royal Assent after passing both houses of Parliament.

The Act significantly increases the financial and reputation risks for businesses contracting with Australian consumers and small businesses. Businesses have less than 12 months to identify and review their standard form contracts ahead of the commencement of potentially substantial financial penalties.

When does the unfair contracts term regime apply?

Currently under the Competition and Consumer Act 2010 (Cth) (CCA) unfair contract terms are unenforceable if the following apply:

• the contract term is unfair;
• the term is in a consumer contract or a small business contract; and
• the contract is a standard form contract.

What is an unfair contract term?

A contract term will be considered unfair if:

• it would cause a significant imbalance in the parties’ rights and obligations under the contract;
• is not reasonably necessary to protect a legitimate interest; and
• it would cause detriment, whether financially or otherwise.

In the recent Federal Court decision of ACCC v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 the ACCC alleged, and the Federal Court subsequently agreed, that the nature of the following terms was unfair:

• Automatic renewal terms – This term allowed Fujifilm to automatically renew the contract unless customers cancelled the contract a certain number of days before the end of the current contract term. Additionally, Fujifilm was under no obligation to notify the customer before the renewal would occur.
• Disproportionate termination terms: This term allowed Fujifilm to terminate the contract in a significantly wider range of circumstances than those that would enable the customer to terminate.
• Liability limitation terms: This term required the customer to indemnify Fujifilm without corresponding rights for the customer. Additionally, this term effectively provided a significant cap, reduction, or limitation on Fuji’s total liability to the customer and excluded a claim for consequential loss in circumstances where the customer’s liability had no limit. Fujifilm also purported to exclude any liability for any pre-contractual misrepresentations.
• Termination payment terms: This term required customers to pay significant exit fees to Fujifilm if the contract was terminated. The exit fees included certain charges that Fujifilm could set unilaterally. Further, it provided for payments to Fujifilm upon Fujifilm exercising a right to terminate, including payments for the remaining term of the contract when the customer received nothing in return and forfeited any prepayments.
• Unfair payment terms: This term required customers to pay Fujifilm for software licensed according to the contract, irrespective of whether Fujifilm had delivered the software, and to pay the purchase price before delivery.
• Unilateral variation terms: This term permitted Fujifilm to unilaterally vary several terms of the contract including the rights and obligations between Fujifilm and its customers, prices and terms contained in documents other than the signed contract. Additionally, Fujifilm could unilaterally vary several terms of the contract with no obligation to give notice of the variation to the customer.
• Incorporation of additional terms: These terms purported to incorporate additional contractual terms by reference to other documents that were not readily accessible by the customer and that Fujifilm could unilaterally vary without notice.
• Suspension: This term allowed Fujifilm to suspend provision of services while still requiring payment for the services.

Fujifilm admitted that the abovementioned terms in its standard form contracts were unfair and consented to various declarations and orders by the Federal Court.

What are the changes?

The Act will introduce the following changes to the unfair contract terms laws:

• Civil Penalties – Any unfair contract terms in standard form contracts will be deemed unlawful, and any businesses using or relying on unfair contract terms will be subject to financial penalties. The Act also introduces higher penalties for breaches of the CCA as follows:
• For individuals:
• The maximum penalty will be $2.5 million.
• For corporations:
• The maximum penalty will be the greater of:
• 50,000 penalty units ($50 million); and
• Three (3) times the amount of the benefit derived from the contravention. However, if the value of the benefit cannot be determined then the relevant amount will be 30% of the turnover of the corporation and its related bodies corporate for the period when the corporation was in breach (with a minimum period of 12 months).
• Extended Scope – The Act expands the scope of a ‘small business contract’. A small business contract will mean a contract for the supply of goods or services with at least one party to the contract being a business that employs less than 100 persons or having a turnover of less than $10,000,000.
• Standard Form Contracts – The Act provides that a contract may be a standard form contract notwithstanding a party to the contract had an opportunity to:
• negotiate changes to the terms of the contract that are minor or insubstantial in effect;
• select from a range of options determined by the other party; or
• negotiate the terms of another contract or proposed contract.
• Orders – The Bill proposes to introduce powers to allow the Court to make more flexible orders to prevent, reduce or minimise loss or damage concerning unfair contract terms. These powers are in addition to the civil penalties.

Commencement

The changes will come into effect 12 months after Royal Assent, that is on 9 November 2023, and will apply to new contracts and renewals from that date and any terms that are varied from that date. This 12 month period is intended to allow businesses time to review and amend relevant contracts in preparation for the new changes.

If you need advice regarding the changes and how they may apply to you or your business, or any other consumer law issues, please contact Thomson Geer’s Intellectual Property team.