Unfair contract terms: a year in review.

Background

The Australian Consumer Law (ACL) and the Australian Securities and Investments Commission (ASIC) provides protections to consumers and small businesses against unfair contract terms (UCT Regime).

The UCT Regime first came into effect in 2010 and was introduced to protect consumers and small businesses from being offered contracts on a ‘take it or leave it’ basis and those contracts containing terms that are unfair.

In November last year, there were significant changes to the UCT Regime, which saw many businesses scrambling to ensure their standard form contracts were ‘fair’ under the new regime.

It has now been over 12 months since these changes have come into effect, so…what have we learnt?

What were the changes in 2023?

From 9 November 2023, the UCT Regime saw broader application to businesses and the introduction of significant penalties.

The definition of a ‘small business’ expanded to apply to many more businesses. Prior to the reform, a party to a standard form contract is considered a small business under the UCT Regime if it had less than 20 employees. This changed to businesses with up to 100 employees or with an annual turnover of less than AU$10m.

Previously, any contract term deemed unfair would be declared void and there were no pecuniary penalties. The penalties under the ACL and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) now include:

• for individuals: up to AU$2.5m under the ACL or 5,000 penalty units (currently AU$1.65m) under the ASIC Act; and
• for companies:
  • the greater of AU$50m, 3 times the benefit obtained from the breach or 30% of turnover under the ACL; or
  • the greater of 50,000 penalty units (currently AU$16.5m), 3 times the benefit obtained from the breach or 10% of turnover under the ASIC Act.

What has happened in the past 12 months?

There has been enforcement of the updated UCT Regime by ASIC and the Australian Competition and Consumer Commission (ACCC).

ASIC has been particularly busy and brought proceedings against large corporations such as PayPal, Auto & General Insurance and HCF Life Insurance for having unfair contract terms in its standard form consumer contracts as follows:

• ASIC v PayPal: the ‘unfair contract term’ in question was PayPal’s Fee Error Term which required businesses to notify PayPal of errors or discrepancies in PayPal’s pricing or fees within 60 days. In this absence of such notification, the fees are considered accepted as accurate by the business. The Federal Court of Australia (FCA) found this to be unfair as it imposed an obligation on small businesses to examine account information and statements to identify wrong charges. PayPal was in a better position to identify these errors and it did not seek to rebut the presumption that the term is not reasonably necessary to protect its legitimate interests.
• ASIC v Auto & General Insurance: in its Product Disclosure Statement, Auto & General Insurance (A&G) required insured parties to ‘tell us if anything changes while you’re insured with us’. ASIC alleged this was an unfair contract term as it was an unclear and broad obligation on the consumer. The FCA disagreed noting that this obligation is reasonably necessary to protect A&G’s interests as the insurer and is qualified by A&G’s obligations under the Insurance Contracts Act 1984 (Cth) (ICA) (specifically, its duty to act in the utmost good faith and prohibition against refusing to pay claims in certain circumstances). ASIC appealed the FCA’s decision. The appeal was heard on 28 August 2024 with the judgment reserved.
• ASIC v HCF Life Insurance: ASIC alleged that the ‘pre-existing condition’ term in 3 insurance policies offered by HCF Life Insurance (HCF) is unfair. This term allowed HCF to deny coverage if a customer did not disclose a pre-existing condition before entering the contract, even if a diagnosis had not been made. To ASIC, this suggests that HCF can deny coverage even if the customer was not aware of the pre-existing condition. While the FCA did not consider this term to be unfair, it ruled the term to be misleading on the basis of section 47 of the ICA. This section allows insurers to deny coverage based on pre-existing conditions only in circumstances where a reasonable person in the customer’s position should have been aware of the condition.

While the ACCC has yet to commence any proceedings against businesses under the updated UCT Regime, it has warned franchisors in a media release of the legal risks of unfair contract terms after a targeted compliance check revealed that every franchising agreement reviewed by the ACCC contained potentially unfair contract terms.

The ACCC has also indicated that unfair contract terms in consumer and small business contracts remain a priority in its 2024-25 Compliance and Enforcement Priorities. The ACCC continues to prioritise protecting vulnerable or disadvantaged consumers and small businesses.

Key takeaways

So, what have we learnt about the UCT Regime in the past 12 months? The answer is…not much.

A year on, the updated UCT Regime is still a developing area and its application remains largely uncertain. The FCA’s varying positions in the ASIC proceedings highlights that context is key when it comes to determining what is an unfair contract term. This includes considering any other relevant legislation.

Given this grey area and significant risks to businesses, it is important to seek expert legal advice on contract terms to minimise any potential breach of the ACL or ASIC Act.

We will continue to monitor significant developments relating to the UCT Regime. If you would like our assistance or have any questions, please contact us at info@bespokelaw.com.