Introduction

The two hot-topics in Australian law reforms for 2022 and 2023 have been:

1. The unfair contracts terms overhaul under the Australian Consumer Law (as per the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 which passed both Houses on 27 October 2022) (UCT Reforms); and
2. Upgrades to the Australian Privacy Act 1988 (Cth) (Privacy Act) to harmonise with the European Union’s own privacy laws, the General Data Protection Regulation (GDPR) (with a review and proposals by the Attorney-General’s Office being completed on 16 February 2023).

A common denominator for both reforms is the increased enforcement powers by regulators as well as the substantially increased penalties for contraventions of the new laws.

Importantly, the UCT Reforms increases the risk of a software contract (amongst others) being captured by the unfair contract terms regime for a substantially greater proportion of Australian businesses and international organisations doing business in Australia. This risk arises with the change to the definition of a small business contract.²

The UCT Reforms will apply to any new standard form consumer or small business contracts entered into, or existing such contracts renewed after, 9 November 2023.

In this article, we discuss how easy it is now for software contracts to be caught by the Australian unfair contract terms regime, how breaches may result in substantial penalties and what software licensors and service providers should be doing to prepare for the UCT Reforms.

How companies outside Australia may be caught by the Australian law

The Competition and Consumer Act 2010 (Cth), which is the parent law that contains the Australian Consumer Law and the unfair contract terms regime, extends to conduct outside of Australia by bodies corporate incorporated or carrying on business within Australia.

The tests for determining whether an international company is ‘carrying on a business’ within Australia are broad. Australian federal courts have expressed two broad limbs, being:

1. there is a series or repetition of acts by that company; and
2. those acts are engaged in for the purpose of profit.¹

Some examples that indicate an international software company is ‘carrying on a business’ in Australia include:

• having many customers in Australia and earning significant revenue from Australian customers on an ongoing basis;
• having content held or deposited on multiple servers in Australia when requested by a subscriber;
• having significant personal property located in Australia;
• incurring significant monthly expenses in Australia for the servers, and paying those expenses to an Australian bank account of an Australian company;
• establishing relationships with content delivery providers in Australia to provide caching services; or
• entering into contracts with third party service providers that provide content around the world, including in Australia.

New penalties and contraventions under the UCT Reforms

Previously, the Australian unfair contract terms regime rendered any term of a consumer or small business contract void and unenforceable if the term is unfair and the contract was a standard form contract. This voiding of the unfair term remains, but new penalties imposed by the UCT Reforms will apply to new contraventions.

From 9 November 2023, a person will contravene the Australian Consumer Law and the unfair contract terms regime (and so be subject to the new penalties) if:

1. a person makes a standard form consumer or small business contract and proposes an unfair term in that contract; or
2. a person relies on, or attempts to rely on, an unfair term in a standard form consumer or small business contract.

Importantly, the UCT Reforms do not distinguish between wilful and accidental or unintentional proposals or reliance on unfair terms. For example, a software licensor may issue a template end user licence agreement (EULA) to thousands of customers automatically upon an online subscription to its products. Irrespective of intention, if that EULA contains an unfair term then the software licensor will have contravened the unfair contract terms regime, if contracting with a consumer or small business when the licensor is incorporated or carrying on a business in Australia. This highlights the ease with which software companies may unknowingly contravene the unfair contract terms regime and be subject to the hefty new penalties.

The UCT Reforms makes it an offence to contravene the Australian unfair contract terms regime, with the maximum penalties applicable for each offence to be:

1. For natural persons, AUD$2.5 million; and
2. For companies, the greater of:
3. AUD$50 million;
4. if the court can determine the value of the benefit obtained by the body corporate from that breach, then three times the value of that benefit; and
5. if the court cannot determine the value of the benefit obtained, then 30% of the body corporate’s adjusted turnover during the breach turnover period for the offence, act or omission.

Importantly, the UCT Reforms state that a party can breach the unfair contract term regime multiple times in the same contract. The UCT Reforms states that a company commits a separate contravention for each term that is unfair that the person proposed. For example, a template software licence agreement with five unfair contract terms could render the software licensor at risk of a penalty of up to AUD$250 million.  

What is a standard form contract?

Previously, the Australian Consumer Law listed several criteria that indicated whether a contract was a standard form contract. These include any or all of the following:

• if one party had all or most of the bargaining power;
• if the contract was prepared by one party before any discussions relating to the transaction occurred between the parties;
• if the other party was effectively required to either accept or reject the contract as is; or
• if the other party was not given an effective opportunity to negotiate the contract.

The above criteria will remain in the Australian Consumer Law post implementation of the UCT Reforms.

Companies previously attempted to circumvent the unfair contract terms regime by engaging in negotiations with the contract counterparty, and allowing that other party to propose amendments to the contract. However, the UCT Reforms have now clarified that a contract may be determined to be a standard form contract despite the existence of one or more of the following:

1. an opportunity for a party to negotiate changes that are minor or insubstantial in effect;
2. an opportunity for a party to select a term from a range of options determined by another party; and
3. an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

In essence, allowing the other party to only negotiate the terms that are insubstantial (as distinct from terms that are substantial in their effects such as indemnities, limitations of liability, termination, etc) is unlikely to alleviate companies’ risks of breaching the Australian unfair contract terms regime from 9 November 2023.

Small Business Contracts

The unfair contract terms regime in Australia applies to both ‘consumer contracts’³ and ‘small business contracts’.

The UCT Reforms define a ‘small business contract’ as one which meets the following criteria:

1. the contract is for a supply of goods or services or a sale or grant of an interest in land;
2. at least one party to the contract satisfies either (or both) of the following conditions:
   • it makes the contract in the course of carrying on a business and at a time when it employs fewer than 100 people; and/or
   • its turnover…for the party’s last income year⁴ that ended at or before the time when the contract is made, is less than AUD$10 million.

So, the following types of software contracts will be captured:

1. those between large businesses and small businesses; and
2. those between small businesses.

According to the Australian Bureau of Statistics, for the year of 2021-2022, approximately 92.6% of Australian businesses had a turnover of less than AUD$2 million.⁵

This means that statistically, there is a strong probability that any particular organisation conducting business in Australia will enter into at least one or more contracts in 2023/2024 with a small business that will be subject to the unfair contract terms regime, where the contract is a standard form contract.

How might contract terms in software and technology licensing agreements contravene?

The Australian Competition and Consumer Commission (ACCC), Australia’s competition and consumer regulator, has, over the years, issued proceedings over the deployment and use of unfair contract terms in standard contracts, with the most recent landmark case being Australian Competition and Consumer Commission v FujiFilm Business Innovation Australia Pty Ltd. [2022] FCA 928 (for a summary of this case, please see Dentons - What now for contracts after the Federal Court Fujifilm case for Australia’s unfair contract regime?).

The history of these proceedings shows that the ACCC has focused on certain provisions in contracts, many of which are commonly deployed in software and technology licensing agreements. These case law precedents indicate that the following terms are likely to be unfair when included in a standard form contract with a consumer or small business.

1. Unilateral variation of terms of the contract: Software agreements often include the ability for the service provider or software licensor to vary the terms of the contract at their discretion (with a notice period, for example, 30 days) and provide that a customer’s continued use of the service after that notice period will constitute acceptance of those varied terms.

2. Automatic renewals: Subscription software service agreements often include automatic renewals of the agreement (i.e. weekly, month, annually, etc) unless the customer gives notice to cancel the agreement, in circumstances where the service provider, or software licensor, is not required to notify the customer of the upcoming renewal.

3. Incorporating extraneous documents: Software agreements often incorporate the terms of several other documents, where these additional documents are difficult to identify or they are not provided to the customer prior to entering into the contract. These can include, for example, general terms and conditions of use, end user licence agreements and acceptable use policies.

4. Unilateral protections and rights: Many software agreements are one-sided in favour of the software licensor and include provisions where:

• only the liability of the software licensor to the customer is limited, but the customer has a higher liability exposure or unlimited liability;
• only the customer gives indemnities to the service provider (which are usually broad, such as an indemnity for claims arising out of ‘any use of the software’); and
• consequential and indirect losses are excluded from the liability of the software licensor to the customer, but not for the customer.

5. No refunds in case of termination: Software agreements often include provisions that provide that prepaid fees will not be refundable where the software licensor has terminated the contract.

6. No liability for prevented or hindered performances: Software agreements may often include a clause disclaiming the service provider from any liability for prevented or hindered performances (for example, where software implementation is delayed for any reason or if the software service is interrupted for any reason). This also includes standard force majeure clauses where they only operate for the benefit of the software licensor and not for the customer.

7. Penalties: Software agreements may often include clauses that are penalties. These can include, for example, charging an administrative fee where the customer does or does not do something and that fee is not proportionate to the expected loss likely to be suffered by the software licensor as a result.

Naturally, there are often sensible and justifiable commercial reasons and considerations for software licensors implementing the above types of clauses. The key issue is whether and how a balanced and modified version of these protections may still be deployed in software agreements without breaching the unfair contract terms regime.

Can a software contract be caught by both the Privacy Act and UCT Reforms

Software service providers and licensors are at particular risk operating in the Australian environment due to the reforms to the Privacy Act and the UCT Reforms, as these laws are not harmonised so as to remove the risk of double penalties. Software service providers and licensors could be liable for penalties under both laws for the same contract⁶. An example illustrating this point is shown below.

Supplier enters into a contract with Client to provide data migration services for Client’s customer data. This contract is a standard form contract and includes a term that states the liability of Supplier arising out of, or in connection with, the data migration services is limited to the fees paid by Client (without any reciprocal liability limitations for Client). Unbeknownst to Supplier, Client at the time of contracting only had 50 employees. Supplier subsequently suffers a data breach due to negligent and inadequate data security measures, and the personal information of Client’s customers is leaked (such as emails, phone numbers and addresses) and used for scam communications. Some of these customers fall victim to these scams and suffer damages, and make claims against Client, who in turn makes a claim against Supplier. Supplier relies upon the limitation of liability clause.

In this example, Supplier could be found liable for three distinct contraventions: 

1. Proposing an unfair contract term in a standard form small business contract⁷ ;

2. Engaging in conduct that is a ‘serious interference’ with the privacy of individuals⁸ ; and

3. Relying on an unfair contract term in a standard form small business contract.⁹

What should software service providers and licensors be doing now to prepare for the UCT Reforms?

The UCT Reforms will apply from 9 November 2023, where the software provider or licensor is entering into a new agreement, or renewing or varying an existing agreement, with a consumer or a small business and that agreement is a standard form contract. Contracts impacted include the following types of software contracts:

• New software development and implementation contracts and new software licence agreements or which are self-renewing after that date;
• New or existing software licence agreements (such as EULAs for existing products) that are renewed or varied (i.e. updated or amended) after that date; or
• New or existing generally applicable terms and conditions and/or policies that are updated and/or implemented after that date and are incorporated into the software contract.

All companies that have standard form contracts should review their template contracts, privacy statements and operational procedures for compliance with the UCT Reforms, including:

1. foreign companies that are licensing software or providing software services to Australian businesses and individuals and requiring those Australian businesses and individuals to use that company’s standard form contracts;
2. foreign companies that are engaging in Australian businesses and individuals to provide software development services or licencing software from them and requiring those Australian businesses and individuals to use that company’s standard form contracts; and
3. Australian businesses and individuals that provide and receive software services from each other within Australia using standard form contracts.

To prepare for the implementation of the UCT Reforms, foreign companies and Australian businesses alike should do the following now:

1. Check and update existing standard form or template contracts for compliance with the unfair contract terms regime: Be on the front foot and review and update template contract documents for compliance with the UCT Reforms. The earlier that an organisation can review and update the terms of their template contract documents and train their employees on the same, the lower the risk that organisation will contravene the unfair contract terms regime and the fewer business disruptions will be encountered when the UCT Reforms are rolled out.

2. Develop and implement processes to conduct due diligence on contract counterparties when using standard form contracts: Given the broadened definition of a ‘small business contract’, organisations should, in consultation with their legal team, develop and implement processes for investigating the contract counterparty on the other side of their proposed contracts to determine if that party is a ‘small business’. This is particularly important when contracting with subsidiaries of large companies, because it is easy for the contract with the smaller subsidiary to potentially be a contract with a ‘small business’, meaning that the standard form contract will come under the purview of the Australian unfair contract terms regime.

3. Review any existing standard form contracts previously entered into, or that are renewing or being varied, on or after 9 November 2023: Organisations should review and obtain legal advice on those standard form contracts prior to their renewal or variation after 9 November 2023. In particular, organisations should obtain legal advice on the re-negotiation and re-drafting of those standard form contracts for compliance with the UCT Reforms.

4. Keep up with UCT Reform updates and guidance: Organisations should keep abreast of updates and guidance in the UCT Reforms by obtaining legal advice and having regular ‘check ins’ with legal advisors leading up to 9 November 2023.

The Dentons Australia Intellectual Property and Technology team can assist you with monitoring legal developments and reviewing and advising on your existing standard form contracts and templates for software services and licences. We are also experts on the legal issues surrounding SaaS agreements and general commercial agreements that encompass technology components, such as artificial intelligence and robotics. 

For any questions, please contact their Dentons IPT team here.

1. Australian Competition and Consumer Commission v Valve Corporation (No 3) (2016) 337 ALR 647

2. At minimum and subject to the company’s turnover.

3. A consumer contract is defined under the Australian Consumer Law as a contract for the supply of goods or services (or a sale or grant of an interest in land) to an individual whose acquisition of those goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

4. Within the meaning of the Income Tax Assessment Act 1997 (Cth).

5. https://www.abs.gov.au/statistics/economy/business-indicators/counts-australian-businesses-including-entries-and-exits/latest-release

6. The penalties under the Privacy Act for ‘a serious interference’ or ‘repeated interferences’ with the privacy of individuals include:

1. (a) for a person, up to a maximum of AUD$2.5 million; and
2. (b) for a company, up to a maximum of the greater of:
   • AUD$50 million;
   • 3 times the value of the benefit derived by the company (or its related entities) either directly or indirectly from the serious or repeated interference of the privacy of individuals; or
   • If a court is unable to determine the value of the benefit per (ii) above, then 30% of the company’s adjusted turnover over the breach turnover period.

7. New section 23(2A) of the Australian Consumer Law as per the UCT Reforms.

8. Section 13G(1) of the Privacy Act.

9. New section 23(2C) of the Australian Consumer Law as per the UCT Reforms.