Companies Take Note: 12 months to Review your Contract Terms Before Unfair Contract Term Penalties Apply, ACL Maximum Penalties Increased to $50m

The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 passed both Houses of Parliament on 27 October 2022 and will enter into force after receiving Royal Assent, which is expected imminently.  

The new legislation broadens the application of the ‘unfair contract terms’ provisions in the Australian Consumer Law (ACL) and introduces penalties for breaches of the provisions and significantly increases the maximum penalties for breaches of provisions of the Competition and Consumer Act 2010, including the ACL.

Unfair Contract Terms Subject to Pecuniary Penalties

The ‘unfair contract terms’ provisions of the ACL presently apply to render void a term of a standard form consumer contract or small business contract if the term is unfair. A term of a consumer or small business contract is unfair if:

• it would cause a significant imbalance to the parties’ rights and obligations under the contract; and

• it is not reasonably necessary in order to protect the legitimate interests of the party advantaged by the term; and

• it would cause detriment to a party if it were to be applied or relied on.

The new legislation will impose pecuniary penalties on companies which include use unfair contract terms, and a separate penalty can be imposed for each unfair term within a contract. There is a 12 month grace period from the date the Bill receives Royal Assent before the penalties apply.   

Unfair Contract Terms Scope Expanded

The Unfair Contract Terms provisions presently apply where one party to the contract is a small business.   The new legislation expands the application of the unfair contract terms provisions by amending the test for a small business contract as follows:

•  increasing the maximum number of employees of the small business from 20 to 100;

• including an alternate test for a small business as one which has a turnover of less than $10,000,000 at the time the contract was entered; and

• removing any financial thresholds in respect of the contract price (previously capped at $300,000).

The effect of these changes is that many contracts between companies will now come within the unfair contract terms regime. Businesses should keep this in mind whenever entering into a contract with a company which either employs less than 100 people or has an annual turnover of less than $10million.

Five-fold Increase to Maximum Penalties

The maximum financial penalties for a breach of the ACL will increase to

              Companies - the greater of:

•  $50 million (previously $10 million);

• 3 times the value of the "reasonably attributable" benefit obtained from the conduct; or

• 30% of the company’s adjusted turnover during the breach period (previously 10%).

 Individuals  - $2.5 million.

 Time for Review

We recommend companies carefully review all standard form contracts and terms and conditions to ensure compliance before the conclusion of the 12 month grace period.

Contacts:

Gerry Tzortzatos Mark Mackrell

PH: +61 2 9230 9445 PH: +61 2 9230 9415