Home Insights New unfair contract term laws in Australia introduce large financial penalties

New unfair contract term laws in Australia introduce large financial penalties

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2  minute read
Date published
08 November 2022
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Significant changes to the unfair contract term provisions in the Australian Consumer Law (foreshadowed in our earlier article), including potential financial penalties, will soon apply. If you are doing business in Australia, you should consider reviewing your standard form contracts to ensure they comply with the much stronger provisions.

The new laws will take effect 12 months from the date they are formally enacted, which is expected to take place shortly – so an effective due date for compliance is end-of-month October 2023. This “grace” period is intended to provide businesses with reasonable time to review the terms of their standard form and small business contracts, and to make the necessary amendments.

Offences and penalties for unfair contract terms

Currently, a term which is found to be unfair is simply not valid or enforceable, and only a person who suffers loss as a result of the term is entitled to receive damages to compensate the loss. There is no penalty for including or relying (or purporting to rely) on such a term.

In contrast, significant fines may be incurred for breach of the new offence provisions as it will be prohibited tomake a contract which contains an unfair contract term; and/or, rely on, or purport to rely on, an unfair contract term.

For corporations, the maximum financial penalty for contraventions of the Australian Consumer Law (including unfair contract terms) will increase to the greater of:

  • AU$50 million (an increase from AU$10 million);
  • three times the value of the benefit to the company if able to be determined (unchanged); or
  • 30% of the corporation’s turnover during the offence period (an increase from 10% of the annual turnover in the 12 months prior to the breach).

Individuals now face a maximum penalty of AU$2.5 million (an increase from AU$500,000). While penalties will not apply to existing contracts, an offence will be committed in respect of all new contracts and renewals or variations of existing contracts.

Expanded definitions of “small business contract” and “standard form contract”

A business commits a separate offence in respect of each unfair contract term identified in a “small business contract” or “standard form contract”. The definitions of these terms have also been clarified, and will now capture more businesses:

  • the ambit of a “small business contract” now extends to businesses with fewer than 100 employees (an increase from 20 employees) or a turnover less than $10 million will now be captured as “small business contracts”; and
  • the meaning of a “standard form contract” now expressly applies to contracts which provide the other party with an opportunity to negotiate insignificant changes, to choose a term from a range of specified options or for a party to a different contract to enter negotiations in respect of the terms of that other contract.

Key takeaways for businesses

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.