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EULA be sorry – are end-user licence agreements a risk to businesses under the new Unfair Terms regime?

EULA be sorry – are end-user licence agreements a risk to businesses under the new Unfair Terms regime?

Published on November 8, 2023 by Alex CollieAlex Collie

They are a ubiquitous feature of our electronic lives, and you have no doubt agreed to hundreds if not thousands of them throughout your life. End-user licence agreements (often known simply as EULAs) are the extensive legal agreements that require you to click an “I agree” affirmation before using software products and services. Some EULAs will even require a user to scroll through the entirety of its text before being able to continue, to provide some edifice of it having been read. However, it is accepted that EULAs are seldom read, with the terms and conditions of many of the most popular apps requiring over an hour to read in full.

While the contractual provisions of a EULA can often differ, they tend to have one defining feature: outside of a (rare) option to opt-out of part of the agreement (usually relating to marketing) they are contracts with no right to negotiate. For example, there is no “negotiate amendment” button provided, only “I agree” or “cancel”. In many cases this is a practical necessity; businesses with thousands or millions of users simply cannot negotiate specific contracts and require a one-size-fits-all approach. Of course, such an approach will also generally include provisions heavily in the favour of the software provider, including terms that some might consider to be a tad… unfair. This article examines whether end-user licence agreements (EULA) are a risk to businesses under the new Unfair Terms regime which takes effect 9 November 2023.

The Unfair Terms Regime under the Australian Consumer Law

The Australian Consumer Law (ACL) sits within the Competition and Consumer Act 2010 (Cth) and provides many protections for Australian consumers such as ensuring products are fit for use or that businesses do not engage in misleading conduct. Amongst those provisions are a protection for consumers against unfair contract terms in standard form contracts.

Standard form contracts under the ACL refer to contracts used frequently by businesses using a set precedent with little to no opportunity for the other party to adjust or negotiate the terms. The phrase “take it or leave it” appears often in the explanatory memoranda of these provisions. Under its initial structure, the unfair contract terms provision voided any term of these “standard form contracts” made with a consumer where the term was deemed “unfair”. In November 2016 these protections were expanded to include small businesses that employed fewer than 20 employees. This threshold (and the number of businesses included) is set to increase on 9 November 2023, which is explained further below.

A term of a standard form contract is “unfair” under the ACL where it meets all three of the following requirements:

  • Causes a significant imbalance in the parties’ rights and obligations under the contract;
  • Is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term;
  • Causes detriment (financial or otherwise) to a party if applied or relied upon.

To assist in understanding the above requirements, the ACL provides some examples of terms that may be considered unfair, including terms that:

  • Permit one party (but not another party) to terminate the contract;
  • Allow one party (but not another party) to vary the terms of the contract; or
  • Limit the ability for one party to sue another party under the contract.

Where a term of a standard form contract is deemed “unfair” it is void under the ACL and no longer applies. The balance of the contract will continue to apply, if possible.

What are the 9 November 2023 changes?

An amendment as part of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) brings two key changes:

  1. The definition of “small business” under the ACL is increased to businesses that employ fewer than 100 persons (or the part-time equivalent thereof) and have a turnover in the last income year of less than $10 million; and
  2. Introduces penalties for contravening the unfair terms provisions.

The penalties for corporations are complex but have a maximum penalty per infraction of $50 million (however, this figure may be increased based on the “value” of the breach or the annual turnover of the corporation). Previously, the sole penalty for companies who have been found to have breached the unfair terms provisions has been to legal costs of the Australian Competition & Consumer Commission (ACCC) for the enforcement action plus any costs in subsequent compliance action. With the introduction of significant pecuniary penalties, EULAs containing unfair terms present a financial risk to companies that rely upon them.

The risk of EULAs

EULAs are almost certainly to be found to be a “standard form contract” under the ACL by their very nature, particularly considering section 27 of the ACL, which indicates the factors to consider such as ability to negotiate or considerations of the characteristics of a party. Because the same EULA is often used over many jurisdictions, they frequently contain provisions providing significant powers for the provider which will then be caveated by words to the effect of “to the extent permitted by the applicable law”.

These broad and often unequal provisions could be ticking time-bombs under the 9 November 2023 changes to unfair contract terms. There is little scope to argue that they do not fall within the definition of “standard form contract” and each provision that does meet the benchmark of being “unfair” is a possible multi-million dollar fine for the corporation that drafted it.

The fact that the corporation itself is not Australian may not be enough to save it. As was seen in Australian Competition and Consumer Commission v Valve Corporation (No 3)[1], the Federal Court of Australia found that a US-based business was carrying on a business in Australia, had acted contrary to the ACL and as a result a $3 million penalty was imposed. This may have not been a major issue for the Valve Corporation, which has annual revenues usually in the multiple billions. However, the high penalties (including penalties based on the infringing company’s turnover) could see their EULAs become a costly albatross.

Companies that rely upon EULAs should consider how they are used, whether they need to be specifically tailored for different jurisdictions and whether the broad provisions often included can be softened to include those terms that they reasonably need to rely upon.

Please contact Carroll & O’Dea Lawyers on 1800 059 278 or via our Contact Page if you have any questions surrounding contracts.

[1] (2016) 337 ALR 647

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