What you don’t know about unfair contract terms: unmasking the hidden unfairness of non-disparagement clauses

On 10 November 2023, significant changes to the unfair contract terms (UCT) regime in Australia come into effect. With expanded application and the introduction of significant penalties for infringement, if you haven’t already, now is the time to assess whether your business is caught by this regime and, if so, update your documentation accordingly.

In this alert, we take a closer look at one term that, while at first blush may not appear unfair, has been found by the courts and the ACCC to be unfair on several occasions: the non-disparagement clause. 

The following discussion focuses on the UCT regime under the Australian Consumer Law (ACL). However, these considerations similarly apply to the parallel UCT regime for financial services under the Australian Securities and Investments Commission Act 2001 (Cth).

How are non-disparagement clauses unfair?

Typically included in contracts to prevent parties from making damaging statements about each other (e.g. employment contracts), non-disparagement clauses may be deemed unfair if they overly restrict a party’s freedom of speech and are not reasonably necessary to protect the legitimate interests of the party invoking the clause. The ACCC is on the record stating “any standard form contract terms that prevent or limit a customer from making public comments about goods or services are likely to be unfair under the ACL.”[1]

In ACCC v Mitolo Group Pty Ltd [2019] FCA 1257, the court found the following clause was unfair:

The Grower will on an exclusive basis to Mitolo refrain from doing any act, matter or thing or make any statement or give any impression that directly or indirectly has or is likely to have a negative effect on the reputation of the Licensed Variety and/or or Mitolo’s businesses.

Relevantly, the court considered that:

• the clause prevented legitimate and justified concerns or views being disclosed to third parties;         
• there was no corresponding obligation on Mitolo; and
• the clause restricted the grower’s ability to enforce its contractual rights against Mitolo and the evidence that could be adduced in any such proceedings.

One strategy to seek to reduce the potential unfairness of a non-disparagement clause may be to confine such clauses to false or misleading statements – in other words, not prohibiting views that are honestly and genuinely held.  This was the approach recommended by both the court in ACCC v Smart Corp Pty Ltd (No 3) [2021] FCA 347 and the ACCC in its regulatory action against Fowler Homes Pty Ltd.[2]

An example of one such remediation we have seen is the following clause, which was tempered by introducing the words in bold:

The customer must refrain from making any statements or comments of a defamatory or disparaging nature (in circumstances where those views are not honestly and genuinely held) to any third party, including on social media, in relation to the supplier or any supplier personnel except as required to comply with any law.

To further alleviate the risk of unfairness, you should consider making the non-disparagement clause mutual, and ensuring it does not restrict a party’s ability to otherwise enforce its rights.

Whilst a non-disparagement clause may often be thought of as unassuming in nature, it may be unfair if it restricts legitimate views or complaints. Accordingly, it is important to review these clauses ahead of the upcoming changes to the UCT regime, and to avoid broad, sweeping terms which are unlikely to be reasonably necessary to protect the legitimate business interests of a party.

Why does this matter?

The new penalties under the UCT regimes are no laughing matter. From 10 November 2023, businesses that are found to propose, apply or rely on an unfair contract term, may receive substantial fines of up to the greater of:

• $50 million;

• three times the value of the benefit received; and

• 30% of adjusted turnover (including turnover of related-bodies corporate) during the period in which the breach occurred (minimum 12 months).

What should I do now?

With the reforms fast approaching, it’s time for businesses to understand the extent to which they are impacted by the changes, and to prepare accordingly. In particular, it is important to: 

• identify template contracts used by your business and assess if they may be a standard form contract (and whether counterparties are given a meaningful opportunity to negotiate them);  
• assess the nature of counterparties to those standard form contracts, to determine whether you enter into contracts with consumers, or with parties with less than 100 employees or whose annual turnover is less than $10m; 
• identify any one-sided, unfair or excessively favourable terms in those standard form agreements; and
• identify and document your company’s legitimate business interests, which can be used to justify the inclusion of contractual terms that would otherwise be considered risky from a UCT perspective. 

If you would like to discuss the practical implications of the changes, or need assistance in conducting a UCT review of your standard form contracts, please get in touch with a member of our Digital and Intellectual Property team.

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[1] ACCC, “Wisdom to remove unfair contract terms”, 6 June 2018, www.accc.gov.au/media-release/wisdom-to-remove-unfair-contract-terms

[2] ACCC, “Fowler Homes Pty Ltd”, 13 December 2022, www.accc.gov.au/public-registers/undertakings-registers/fowler-homes-pty-ltd

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.