In the movie The Godfather, Don Vito Corleone makes an assurance to his godson that the deal will be done, when he says “I’m gonna make him an offer he can’t refuse”. The practice of one party attempting to get exactly the contract terms they require, in circumstances where those terms are unreasonable or unfair, will become more difficult from 9 November 2023. Furthermore, it comes at the risk of Courts imposing penalties for contravention of the Australian Consumer Law.
Australian Consumer Law was introduced in 2010 as Schedule 2 to the Competition and Consumer Act 2010 (Cth). As the name suggests, Australian Consumer Law (or ACL) is intended to protect the rights of consumers. An unfair contract terms (UCT) regime was introduced to expand protections afforded under the ACL, and enable Courts to declare unfair terms in a contract to be void or unenforceable.
From 9 November 2023, the UCT regime will undergo a major consumer- and small-business focused upgrade. The new changes will broaden the applicability of the UCT regime, actively prohibit unfair contract terms, and empower Courts to impose substantial penalties on businesses and individuals who breach the UCT regime.
Relevantly for international businesses, the UCT regime can apply to conduct outside Australia by companies carrying on business in Australia.
The new UCT rules will apply to all standard form contracts made or renewed on or after 9 November 2023, as well as any contract variations from this date. Individuals and businesses using standard form contracts should prepare, or risk facing heavy penalties.
The purpose of the updated UCT laws, as stated in the Treasury Laws Amendment (More Competition, Better Price) Bill 2022 ( passed in October 2022) is to:
- increase the maximum penalty applicable for anti-competitive behaviour and certain breaches of competition consumer law;
- establish a civil penalty regime prohibiting the use of, and reliance on, unfair contract terms in standard form contracts; and
- expand the class of contracts that are covered by the unfair contract terms.
Note, not all contracts are subject to UCT laws, including insurance contracts (which are regulated by the Insurance Contracts Act 1984), managed investment schemes (which are regulated by the Corporations Act 2001) and certain shipping contracts.
Broader powers for Courts and new penalties for breach
The current UCT laws only enable a Court to make orders voiding part or the whole of a contract if a person has suffered or is likely to suffer, loss or damage because of the conduct of another person.
The new UCT regime will empower a Court to make orders if it is satisfied that loss and damage may be caused and to impose penalties relating to unfair contract terms. Penalties may be imposed if a party who makes a contract proposes an unfair contract term, or applies or relies on an unfair contract term.
The potential penalties are substantial. The maximum penalty for companies, depending on the relevant breach, is the greater of $50 million dollars or three times the value of the “reasonably attributable” benefit obtained from the conduct, or possibly 30% of the adjusted turnover during the breach period. For an individual, the penalty could be up to two and a half million dollars.
Furthermore, a Court will now be able to prevent a party who has used or proposed unfair contract terms from continuing to use terms that are the same or substantially similar in their future standard form consumer or small business contracts.
The new UCT regime makes it a contravention for a person to attempt to rely on an unfair term in a standard form consumer or small business contract they have made. Furthermore, the same contract may have multiple contraventions. This potentially renders a range of provisions of standard form contacts void, while exposing the vendor to multiple pecuniary penalties.
Additional considerations for a “standard form contract”
A fundamental change to the new UCT regime is that more contracts will fall under the definition of a “standard form contract”.
Currently, where a dispute arises and a party alleges that a contract is a standard form contract, the law adopts a rebuttable presumption that this is the case, and the onus is on the contract-preparing party to prove that it is not. Factors that go into this consideration of whether a contract is standard form currently include:
- who has all or most of the bargaining power in the transaction
- whether one party prepared the contract without or before any discussion regarding the transaction took place
- whether the contract is “take it or leave it”
- whether there was any real opportunity to negotiate the terms of the contract
- whether the terms of the contract take into account any specific features of the other party or that particular transaction
The new UCT laws will now clarify that a contract may still be a standard form contract despite there being an opportunity for:
- a party to negotiate changes that are minor or insubstantial in effect;
- a party to select a term from a range of options determined by another party; or
- a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.
Furthermore, a Court may also consider whether the contract is identical or similar to previous contracts used by the preparing party.
To mitigate the risks of contravention of the new UCT regime, businesses should undertake a review of existing and upcoming contracts with customers. Repeated or re-used contracts, even when previously agreed by the other party after being given ample opportunity for negotiation, may be considered a standard form contract after 9 November 2023.
Expanded definition of “small business contract”
Prior to 9 November 2023, the ACL only protects small businesses under the UCT regime if they have 20 or fewer employees, and the upfront price of the transaction is $300,000 (or AUD1 million for contracts exceeding 12-months).
The UCT updates significantly expand this threshold. From 9 November 2023, a business with 100 or fewer employees, and a turnover of less than $10 million, will be eligible for UCT protection under the ACL.
Larger businesses using standard form contracts will need to carefully consider whether existing contracts, upcoming contract renewals and new contracts will fall under the broader definition. In instances where classification is difficult due to employee and turnover fluctuations, businesses may wish to consider taking the conservative approach by deeming such borderline businesses as “small businesses” for the purposes of UCT review.
“Unfair” remains the same
The meaning of “unfair” remains unchanged under the UCT updates. A term of a consumer or small business contract is unfair if it:
- would cause a significant imbalanced in the parties’ rights and obligations arising under the contract; and
- is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
There is no exhaustive or prescriptive list of what constitutes an “unfair term”. However, case law since the introduction of UCT laws provide guidance, and include:
- terms which permit one party only to avoid or limit performance under the contract
- terms which permit unilateral rights to vary a contract
- terms which permit a unilateral right to terminate a contract
- one sided indemnity clauses
- one sided limitation of liability provisions
- auto-renewal clauses in favour of one party only
Ultimately, businesses will need to undertake due diligence and obtain robust legal analysis on whether their standard form contracts contain terms that could be considered unfair, and work with lawyers to “re-balance” or even remove such clauses.
A brief historical reflection
Although these new UCT laws have been couched in modern and legislative terms, the principles behind the UCT regime updates have long been held under the laws of equity.
At the most fundamental level, the protections provided for consumers and small business are based on the principle of “unconscionable conduct”, which centres around the protection of those with “special disadvantages” from being taken advantage of by those in more powerful positions. While no formal definition exists, in equity nor statute, “unconscionable conduct” has been identified as conduct which “defies good conscience”, and in many ways serves as a broad descriptor for the conduct which the ACL seeks to protect consumers and small parties against.
At the same time, there has been a well-known struggle to balance the freedom of individuals and businesses to treat and enter into agreements as they see fit with commercial certainty and understanding, relative to the importance of protecting those lesser empowered from disadvantage.
Historically, this has presented itself in judicial reluctance to intervene in commercial relationships, unless the conduct was “unconscionable” to the extend that it met a high standard of “moral obloquy” or “moral taint”.
However, back in 2014, this approach was updated in Australian Competition and Consumer Commission (ACCC) v Lux Distributors Pty Ltd. The Full Federal Court highlighted the context of the legislative provisions in which “[n]otions of justice and fairness are central, as are vulnerability, advantage and honesty.” The conduct was thus evaluated by reference to social norms and values of whether the conduct was honest, fair and without deception or unfair pressure to determine whether or not it was considered “unconscionable”.
Although “unconscionability” and the UCT regime are distinct concepts in the ACL, the update of the UCT regime represents the ongoing expansion and development of Australian Consumer Law to continuously reflect Australian values and expectations of justice, fairness, and honesty.
Francis Ford Coppola may be disappointed to learn that in 2023, an assurance by his character in The Godfather movie that “either his brains or his signature will be on the contract” would result in a significant pecuniary penalty being applied under the ACL if the arrangement had an Australian connection