Stephens Lawyers & Consultants
Businesses have until 8 November 2023[i] to review their standard form contracts to ensure they comply with recent changes to the Australian Consumer Law which prohibit unfair contract terms – or risk incurring high financial penalties.
Standard form contracts are widely used in a wide range of industries – from energy, telecommunications, travel, finance, technology, on-line retail market-places, social media services, franchising to real estate. They have the benefit of allowing companies to contract with a large volume of consumers and businesses in an efficient and cost-effective manner. However, use of standard form contracts can be problematic, because they are presented on a “take it or leave it basis” with the terms not being negotiable in many cases[ii].
The digital economy relies upon standard terms and conditions which consumers or businesses must agree to, by clicking an “accept icon” in order to make the on-line purchase of services or goods. Buyers have no bargaining power when purchasing on-line and dealing with digital platforms. As a consequence, there are significant imbalances in power between users and digital platforms, resulting in unfair trade practices and terms that are potentially unfair to consumers and small business[iii].
The ACCC, as a part of its ongoing inquiry into digital platforms and on-line market-places, recommended the introduction of new and expanded economy wide measures to deal with these significant power imbalances, including the prohibition of unfair trade practices and the strengthening of unfair contract laws[iv].
This legal update provides an overview of the key changes to Australia’s unfair contract terms laws which were made on the 9 November 2022. The update also provides some guidance for business in respect of steps that can be implemented to minimise the risk of non-compliance.
Changes to unfair contract terms laws
In response to ACCC recommendations, the unfair contract terms laws in the Australian Consumer Law[v] have been strengthened with significant civil pecuniary penalties coming into effect on 9 November 2023 for use of and reliance upon unfair contract terms in consumer contracts and small business contacts that are standard form contracts.
The unfair contract terms laws apply to all “consumer contracts” and “small business contracts” that are standard form contracts, irrespective of their value.
“Consumer contracts” are defined as a contract for the supply of goods or services or sale or grant of an interest in land to an individual whose acquisition is wholly or predominately for personal, domestic or household use or consumption[vi].
As part of the changes in the law, that came into effect on 9 November 2022, the scope of protection for standard form, small business contracts for the supply of goods or services or the sale of or a grant of interest in land was expanded, with the unfair contract terms laws applying to all “small business contracts” where at least one party to the contract is a business that has fewer than 100 employees or has an annual turnover of less than $10 million “for the last income year that ended at or before the time when the contract is made”[vii]
The unfair contract terms laws were also strengthened by providing that “a contract may be determined to be a standard form contract despite the existence of one or more of the following:
(a) an opportunity for a party to negotiate changes, to terms of the contract, that are minor or insubstantial in effect;
(b) an opportunity for a party to select a term from a range of options determined by another party;
(c) an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.”[viii]
In the case of companies, the new maximum financial penalties are the greater of the following:
- AU$50,000,000;
- Three times the value of the “reasonably attributable” benefit obtained from the conduct, if the court can determine this; or
- if a court cannot determine the benefit, 30 per cent of adjusted turnover during the breach period.
In the case of an individual, the new maximum financial penalty will be AU$2.5 million.
Companies, their directors and officers, have until 8 November 2023 to review and update their contracts for compliance with the unfair contract terms law, before the penalty provisions apply.
When will a contract term be unfair?
The Australian Consumer Law provides that a term in a consumer contract or small business contract will be held to be unfair if:-
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- it 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.[ix]
A contract containing an unfair term will continue to bind the parties if it is capable of operating without the unfair term.[x]
A court is entitled to consider a wide range of matters in determining if a contract term is unfair – and is required by the Australian Consumer Law to always consider the contract as a whole[xi] and the extent to which the term is transparent and readily available and presented clearly to the party affected by the term[xii].
In Lobux Pty Ltd v Willshaun Pty Ltd [2022] FCA 204 the Federal Court of Australia held that, “When considered in the context of the agreement as a whole”[xiii] the term in Lobux Pty Ltd’s small business contract which charged all rights, title and interests in all of the customer’s assets which were “capable of being charged” either “now or in the future” was excessive and therefore unfair – as it created “a significant imbalance in the parties’ rights and obligations arising under the agreement”.[xiv]
The Australian Consumer Law also specifies examples of the type of terms in a consumer contract or a small business contract which may be held to be unfair[xv].
The Fujifilm Case – Examples of terms found to be ‘unfair’
In the recent case of Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd[xvi] (Fujifilm) the Federal Court of Australia declared 38 contract terms in 11 Fujifilm contracts entered (or renewed) with thousands of small businesses to be unfair and void[xvii].
In this case, the ACCC commenced proceedings against Fujifilm alleging that:-
(i) between November 2016 and December 2021, Fujifilm had entered or renewed contracts with 34,000 customers (many of which the ACCC believed to be small businesses) using 21 of its standard form contracts for the supply and leasing of printers and related software; and
(ii) that these Fujifilm standard form contracts each included multiple instances of unfair contract terms.
The Federal Court found that 11 of Fujifilm’s standard form contracts included clauses which were unfair and void. Some of the terms declared to be ‘unfair’ included the following[xviii]:-
- Automatic renewal terms – which permitted Fujifilm to renew the small business contract for a further period unless the customer cancelled the contract a certain number of days before the end of the contract term[xix];
- Unilateral variation and extraneous document terms: which permitted Fujifilm to unilaterally vary some of the terms of the contract, including terms and charges which were contained in documents other than the signed contract[xx];
- Unfair payment terms: being terms which required customers:-
- to pay Fujifilm for software licensed pursuant to the agreement regardless of whether Fujifilm had delivered the software; and
- when goods were purchased, to pay the purchase price prior to delivery[xxi].
- Termination payment terms: being terms that, in the event of termination of the contract, required customers to pay Fujifilm extensive exit fees – some of which could be set unilaterally by Fujifilm[xxii];
- Disproportionate termination terms: which allowed Fujifilm a significantly wider range of circumstances to terminate the contract than the customer was allowed –or no reciprocal termination rights allowed to the customer at all[xxiii];
- Limitation of Liability terms: being terms that limited Fujifilm’s liability or required the customer to indemnify Fujifilm without providing the customer with corresponding rights[xxiv].
Some steps that businesses can implement to minimise the risk of non-compliance
With the new financial penalties coming into effect on 9 November 2023, businesses using standard form contracts have a limited period in which to become compliant with the new unfair contract terms law.
Some steps which businesses can consider taking to minimise the risk of non-compliance include:-
- Development of processes which enable the identification of ‘consumer contracts’ and small business contracts which are ‘standard form contracts’, which come within the scope of the new unfair contract terms laws. Where the business has a large volume of contracts, the processes may involve the use of AI tools which enable the identification of the relevant contracts and clauses in contracts which may require review.
Once the relevant standard form contracts and clauses have been identified, these will have to be reviewed by the businesses’ lawyers to assess whether the contracts have any unfair terms.
Assessing whether a term is ‘unfair’ is complex and requires consideration of the contract as a whole taking into account the relative bargaining position of the parties and any imbalances, having regard to the meaning of “unfair” as defined in the Australian Consumer Law, the examples of unfair contract terms given in the law and the recent Australian court decisions which have declared terms to be “unfair” or “fair” when challenged.
- Amending or redrafting standard form contracts to remove any such unfair contract terms and ensuring immediate use of the revised standard form contracts going forward;
- Development of processes for the roll out of the new or revised standard form contracts including processes for existing affected consumers or small businesses to be notified of the new or revised standard form contracts.
- Determining strategies to best deal with the business’ existing clients whose current standard form contracts include ‘unfair term(s)’, with a view to also minimising damage to the business’ reputation and business generally.
- Implementation of ongoing staff training and compliance programs in order to minimise the risk of any future use of or reliance on unfair contract terms.
- The new unfair contract terms laws will also impact the businesses’ existing insurance policies. Insurance policies and cover will have to be reviewed. Some policies may require the insurer to be notified of the changes to the contract terms, particularly where they result in the insurer being exposed to additional risks and liabilities. The insurer may be exposed to additional risk and liability where clauses excluding liability or limiting liability have to be removed from the standard form contract, to be compliant with the new unfair contracts terms laws.
Disclaimer: This legal update is not intended to be a substitute for obtaining legal advice.
For further information contact:
Katarina Klaric
Principal
Stephens Lawyers & Consultants
Melbourne Head Office
Suite 205, 546 Collins Street, Melbourne VIC 3000
Phone: (03) 8636 9100
Sydney Office
Level 29, Chifley Tower, 2 Chifley Square, Sydney, N.S.W. 2000
Phone: (02) 9238 8028
Email: [email protected]
Website: www.stephens.com.au
All Correspondence to:
PO Box 16010 Collins Street West Melbourne VIC 8007
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© Stephens Lawyers & Consultants, 10 April, 2023. Co-Authored by Katarina Klaric (Principal) and Rochina Iannella (Lawyer) Stephens Lawyers & Consultants.
[i] The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth) (a Bill for an Act to amend the Competition and Consumer Act 2010 and the Australian Securities and Investments Commission Act 2001, and for related purposes) received Royal Assent on 9 November, 2022. Penalties for unfair contract terms will commence on “The day after the end of the period of 12 months beginning on the day this Act receives the Royal Assent”. [Sec 2(1) The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth)]
[ii] ACCC, Digital Platform Services Inquiry Interim Report No. 5 Regulatory Reform, September 2022, p44-45, p71.
[iii] ACCC, Digital Platforms Final Report, 26 July 2019, pp37, 497-498. ACCC, Digital Platform Services Inquiry Interim Report No. 5 Regulatory Reform, September 2022, p71.
[iv] ACCC, Digital Platform Services Inquiry Interim Report No. 5 Regulatory Reform, September 2022, p64.
[v] The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) which received Royal Assent on 9 November, 2022 also makes corresponding changes to the Australian Securities and Investments Commission Act 2001 (Cth) which applies to financial services.
[vi] Sec 23(3), Australian Consumer Law.
[vii] Sec 47 of The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) which repealed and replaced Secs 23 (4) & (5) of the Australian Consumer Law
[viii] Sec 42 (3) of The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth)
[ix] Sec 24 of the Australian Consumer Law
[x] Sec 23(2) of the Australian Consumer Law;
[xi] Sec 24(2)(a) and (b) of the Australian Consumer Law
[xii] Sec 24(3) of the Australian Consumer Law
[xiii] Lobux Pty Ltd v Willshaun Pty Ltd [2022] FCA 204 at Par [120] per Downes J
[xiv] Lobux Pty Ltd v Willshaun Pty Ltd [2022] FCA 204 at Par [120]
[xv] Sec 25 of the Australian Consumer Law
[xvi] Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928
[xvii] Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 at Par. [1]
[xviii] Australian Competition and Consumer Commission (ACCC), “38 contract terms in 11 Fuji small business contracts declared unfair and void”, ACCC Media Release, 12 August 2022”
[xix] Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 at Par. [1 (b)]
[xx] Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 at Par. [1(a), (c)]
[xxi] Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 at Par. [1 (j)]
[xxii] Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 at Par. [1 (f)]
[xxiii] Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 at Par. [1 (e)]
[xxiv] Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 at Par. [1 (d)]