Home Insights Major changes to unfair contract term laws in Australia are still in play

Major changes to unfair contract term laws in Australia are still in play

Read time
3  minute read
Date published
30 August 2022

Proposed reforms to strengthen the existing unfair contract term protections in the Australian Consumer Law (ACL) lapsed as a result of a change in Government in Australia in May. The proposed changes contained in the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (TLA Bill) were significant, including potential penalties of AU$10 million.

These reforms are, however, still in play. The new Government announced at its first sitting on 28 July 2022 that it will introduce a new Bill to legislate against unfair contract terms in the upcoming Parliamentary sitting period. While detail is yet to be released, businesses trading in Australia will likely need to review their contract terms.

By way of background, the current unfair contract term protections under the ACL have sometimes been described as a “toothless tiger”. This is because the protections are quite limited in application and where a term is found to be an “unfair contract term”, it is simply void. Only parties who prove to a court that they have suffered loss or damage as a result of the unfair term can be compensated. No penalties currently apply.

The changes are therefore intended to create more “teeth” for the current unfair contract terms regime. This article provides an overview the reforms previously proposed, as we can likely expect the new Bill to be introduced by the new Government to be similar.

Increased scope of application to larger businesses

The scope of application of unfair contract term laws will likely be broadened. It will continue to apply to standard form contracts which are “consumer contracts” or “small business contracts”, but those definitions would be expanded.

Currently, one of the requirements for a contract to be a “small business contract” is that at least one party to the contract is a business employing fewer than 20 persons. The TLA Bill proposed to increase this to either 100 employees or alternatively, for the company to have an annual turnover threshold of less than $10 million. The new Government announced its intention to make this same change during the election campaign.

Growing “teeth” – significant civil penalties and potential remedies

The new Government also announced during the election campaign that the proposal, reliance on or inclusion of any unfair contract terms will be made illegal. There are currently no penalties for parties using unfair contract terms in their standard form contracts. The TLA Bill would have introduced penalties not only for proposing an unfair term but also for relying on the term and we can expect a similar change in the future.

Further, the TLA Bill created separate contraventions for each term which was unfair. This meant that a business could breach the prohibition multiple times in a single contract (and therefore, attract multiple penalties) – for example, when proposing the term and again when relying on it.

For a company, the maximum amount of the penalty under the TLA Bill would have been be the greater of: AU$10 million; three (3) times the value of the benefit the company obtained from the breach of the law (if that can be determined); or, if the court cannot determine the value of that benefit, 10% of the company’s annual turnover.

Terms declared by court to be unfair cannot be used

The TLA Bill provided that if a term was declared by a court to be unfair, there would be a presumption in subsequent proceedings that terms which are the same or have a substantially similar effect will also be unfair. If this proposal is renewed, businesses will need to stay abreast of changes to the law in this area by actively reviewing and amending the terms in their standard form contracts in accordance with the court’s decisions.

Key takeaways for businesses

With the still expected upcoming changes, businesses should prepare to review their standard form agreements for use in Australia and remove or amend any unfair terms. For example, terms of sale or terms of use agreements, licensing agreements, distribution agreements, and service agreements (such as SaaS agreements), are all examples of agreements which may be considered “standard form agreements”, depending on the relevant circumstances, and may contain “unfair terms”.

If you’d like our assistance with conducting a review of your standard form agreements, please contact us.