Australia’s High Court and competition regulator shed light on unfair contract terms reforms and new designated complaints regime

A new designated complaints regime also came into force on 1 May, allowing approved advocacy groups to make complaints about systemic or significant issues to the ACCC and obliging the ACCC to respond within 90 days.

The aim of the UCT regime is to protect consumers and small businesses from ‘unfair’ contract terms in standard form contracts. On 9 November 2023, the UCT regime was expanded and now applies to any “standard form contract” with small businesses with less than 100 employees or a yearly turnover of less than A$10 million (US$6.4 million). The contract value threshold was also removed.

If the UCT regime applies and a term is declared to be unfair, a court has broad powers to make orders to declare void, to vary or to refuse to enforce any or all contract provisions. Significant penalties may also now be applied to those who propose or seek to rely on unfair terms.

Following the introduction of the reforms, a level of uncertainty has existed in industry concerning the application of the expanded UCT regime – particularly as to what contract terms will be considered ‘unfair’ within the meaning of the legislation.

The High Court of Australia’s decision in the Ruby Princess case in December 2023 shed some further light on the application of the UCT regime. The High Court’s ruling also addressed the potential unfairness of class action waivers in standard form contracts.

Further guidance on the application of the reforms was also recently provided in a report by the Australian Competition and Consumer Commission (ACCC) (21-page / 426KB PDF) on what the ACCC considers to be unfair contract terms in franchise agreements.

In addition, the Competition and Consumer Amendment (Fair Go for Consumers and Small Business) Act 2024 (Cth) introduces a new designated complaints regime. The ACCC will now be required to respond to any complaints from certain consumers and business advocacy groups. As a result, contracts will face heightened scrutiny by the ACCC.  

The High Court’s findings in the Ruby Princess class action

Following a Covid-19 outbreak on the Ruby Princess cruise ship, passengers commenced a class action against cruise operator Carnival Corporation. The class members sought compensation from Carnival for loss and damage arising from breaches of the Australian Consumer Law. A significant number of passengers had been in the US when they contracted for the cruise. The US contract contained the following class action waiver clause which meant that the US passengers would not be able to join the class action:

"Waiver of class action: this passage contract provides for the exclusive resolution of disputes through individual legal action on your own behalf instead of through any class or representative action. Even if the applicable law provides otherwise, you agree that any arbitration or lawsuit against carrier whatsoever shall be litigated by you individually and not as a member of any class or as part of a class or representative action, and you expressly agree to waive any law entitling you to participate in a class action..."

According to the High Court’s ruling, the UCT regime applies to corporations operating a business in Australia, regardless of whether they are foreign or domestic, that procure using contracts governed by foreign law and conduct engaged in outside Australia.

The High Court also found that the UCT regime is not limited to contracts entered into while the corporation is engaged in business in Australia. It is also not limited to terms that affect the acquisition of goods and services in Australia, nor contracts performed predominantly inside Australia.

In addition, the High Court found the class action waiver clause was an unfair contract term and void.  The High Court’s reasoning was because it was a one-way restriction imposed for the sole benefit of Carnival, was not reasonably necessary to protect Carnival’s legitimate business interests and would have caused detriment to US passengers. The High Court also noted that the clause was not presented clearly, nor sufficiently available to be reviewed by, nor brought to the attention of the US passengers.

Most major infrastructure and energy projects in Australia have extensive international supply chains and this case demonstrates that cross-border procurement contracts for these projects are not immune from operation of the UCT regime, even where the contract is governed by foreign law, and contractors should be alive to this risk.

That said, given the size of the companies involved and the typically bespoke nature of the contractual arrangements, the UCT regime may have relatively narrow application to cross-border procurement in the energy and infrastructure space.

Practically, a cross-border contract should be treated the same as a domestic contract in terms of the application of the UCT regime. We do not see this judgment as a fundamental game changer, in that regard.

Recommendations from the Australian Competition and Consumer Commission

In December, the ACCC released a report summarising the findings of a compliance check it had conducted on a pool of franchise agreements.

In the report, the ACCC reiterated that UCTs were a priority for it in terms of regulatory enforcement, particularly in relation to franchising.

The report identified five potentially unfair contract terms commonly found in the franchise agreements on which the report was based.

While a different commercial context, there is overlap between franchising and infrastructure subcontracting in terms of the inherent power imbalance in the relationship and the types of standard-form clauses that are commonly found in these contracts – including unilateral variation clauses, clauses dealing with the withholding or setting-off of payments, and termination for convenience.

To date, the ACCC’s approach to the expanded UCT regime appears to have been focussed on educating industry rather than punishing offenders. However, having given this clear statement to the market that it considers the relevant clauses to be unfair, the ACCC may well take a dim view of companies that continue to include such clauses in standard form contracts to which the UCT regime applies, with offenders running the risk of regulatory action being taken against them.

The types of clauses in franchising agreements that the ACCC considers will be unfair under the expanded UCT legislation are as follows:

Unilateral variation clauses

These are clauses that allow one party to unilaterally – that is, independently – vary the terms of the contract.

The ACCC report stated that terms which allow a franchisor to unilaterally change important rights and obligations laid out in an agreement are likely to be problematic when they go beyond protecting the franchisor’s legitimate business interests. The same guidance can be applied to construction contracts.

The ACCC noted that these clauses are a particular concern where the franchisor has an unrestricted ability to change key aspects of the franchise agreement, including the operations manual and the approved products and suppliers list, and where the franchisee does not receive enough notice of the change and has no ability to exit the agreement without suffering financial loss.

Construction contractors may benefit from following these ACCC recommendations to franchisors:

• ensuring that the clause does not go beyond what is reasonably necessary to protect the franchisor’s legitimate business interests;
• specifying the particular circumstances under which the franchisor may make changes;
• providing reasonable written notice to franchisees regarding any proposed changes, keeping in mind what is reasonable will depend on the type of franchise agreement and type of change; and
• providing franchisees with reasonable time to comply with changes and opportunity to negotiate changes.

Withholding or setting-off payments

These are one-sided clauses that allow franchisors to withhold payments or to ‘set-off’ payments against money owed to franchisees. It is common practice to include these terms in infrastructure and energy contracts, where contractors are often permitted to withhold payments or set-off from payments to the subcontractors.

The ACCC reported that these terms could create significant imbalance in the parties’ rights and obligations under the agreement and may be unfair, particularly in situations where they enable the franchisor to withhold payments in any circumstances. This includes situations where the payment by the franchisee is not due or disputed.

The ACCC also said these terms could be unfair in situations where the agreement does not require the franchisor to notify the franchisee before setting off or withholding payments, and where the agreement prevents the franchisee from enforcing their corresponding rights.

Contractors in the infrastructure and energy space may benefit from following these ACCC recommendations to franchisors:

• considering whether the circumstances that allow the withholding of payment go beyond what is reasonably necessary to protect the franchisor’s legitimate business interests, and considering whether limitations need to be set out;
• providing reasonable prior notice of the franchisor’s intention to withhold and set-off payments; and
• specifying the method the franchisee can use to dispute or seek a review of a decision to withhold or set-off payments.

Termination for convenience clauses

These are clauses which allow the franchisor to terminate the contract at any time and without cause – that is, even in situations where the franchisee has not breached the agreement. This clause was not common among the franchise agreements reviewed by the ACCC but is common practice in the construction industry. These clauses are particularly common in downstream subcontracts to protect the contractor in case of a head contract termination.

The ACCC was particularly concerned with these types of clauses because they were said to go beyond what is reasonably necessary to protect the franchisor’s legitimate interests and would cause significant detriment to the franchisee if relied on. The ACCC may not share this view in the context of construction contracts, but construction contractors and other infrastructure businesses should ensure that their termination for convenience clauses do not go beyond what is considered fair in the context of the UCT regime.

Notably, the ACCC was less concerned with termination clauses for failure to remedy a material breach, as long as the franchisee had a reasonable opportunity to remedy the breach. Taking this into account, construction contractors should, where appropriate, consider providing subcontractors with a reasonable ‘cure’ period in their downstream subcontracts, allowing time for subcontractors to remedy the breach.

Construction contractors may benefit from following these ACCC recommendations to franchisors:

• ensuring that termination clauses do not go beyond what is reasonably necessary to protect the franchisor’s legitimate interests, and considering whether termination is an appropriate remedy for particular breaches;
• ensuring clauses are transparent, written in plain language and not hidden in the contract; and
• considering whether there are appropriate counter-balancing terms.

New designated complaints regime

Construction contractors should note that a new designated complaints regime commenced on 1 May, allowing certain consumers and business advocacy groups - to be approved by the relevant minister - to make designated complaints about systemic or significant issues to the ACCC.  Such issues might include complaints about serial UCT offenders, with small businesses having another avenue to apply pressure, via approved advocacy groups, on large corporations that overlook their UCT obligations. 

On 8 April, the Competition and Consumer Amendment (Fair Go for Consumers and Small Business) Act 2024 (Cth) received royal assent. The Act establishes a designated complaints function allowing approved corporations, individuals and consumer and small business advocacy groups to make designated complaints to the ACCC. A complaint is treated as a designated complaint if the ACCC is satisfied that it relates to a significant or systemic market issue that affects consumers or small businesses in Australia and relates to a potential breach of the ACL or relates to the ACCC’s powers or functions under the ACL.

The ACCC will be required to assess and publicly respond to the designated complaint within 90 days, stating what further action, if any, will be taken. Where applicable, the ACCC must commence undertaking the proposed action within 6 months of its response and then report on the outcome.

With this new complaints regime, serial offenders of the UCT legislation run the risk of being exposed via a designated complaint, potentially giving rise to regulatory and enforcement action by the ACCC. It will be interesting to see who the relevant minister designates as approved complainants, and whether this includes any construction industry bodies. 

Co-written by Olivia Micalizzi and Sunny Shan of Pinsent Masons.