In an effort to further protect consumers and deter the use of unfair contract terms, reforms have recently been made to the Australian competition and consumer laws (New UCT Regime).
Key takeaways from the New UCT Regime are:
- changes to the definition of “standard form” contract;
- broadening of the scope of a “small business”;
- to propose and rely on an unfair contract term is now illegal;
- civil penalties for use and reliance on unfair contract terms can be imposed; and
- an introduction of stronger remedies.
The New UCT Regime took effect from 9 November 2023 and will apply to new contracts entered after this date.
However, do not fear, if you or your business has a contract that may fall within the scope of the New UCT Regime, you have 12 months from 9 November 2023 to review and adjust your contracts and practices before you can be liable for the penalties that can imposed under the New UCT Regime.
What contracts fall within the New UCT Regime?
For a term to be “unfair”, it must arise in either a:
- consumer contract; or
- small business contract, and
be part of a “standard form” contract.
How do you know if your contract is one of those?
Standard Form Contracts
Standard form contracts are widely utilised as they provide a quick and efficient way to formalise an agreement. These contracts are made up of terms that are often subject to little to no negotiation. Things to consider when determining if a contract is ‘standard form’ are:
- if one party used the same contract, or a contract in substantially similar terms, before;
- if the contract was prepared by one party prior to any discussion relating to the transaction taking place;
- the contract was offered on a take it or leave it basis;
- there was little or no opportunity to negotiate the terms of the contract; and
- the contract does not take into consideration the specific characteristics of the other party.
Where any of the above apply, the contract may be considered ‘standard form’.
Under the New UCT Regime, the definition of ‘standard form’ has expanded, such that a contract will be ‘standard form’ regardless of whether:
- the parties have the opportunity to negotiate terms that are of minor or insubstantial effect;
- a party can select a term from a range of options pre-determined by the other party; and
- a party to another contract or proposed contract can negotiate the terms of that other contract.
Consumer Contracts under the New UCT Regime
The scope of ‘consumer contracts’ remains unchanged under the New UCT Regime.
A contract will be a ‘consumer contract’ if it is for the supply of goods or services, or the sale or grant of an interest in land, and the acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.
Small Business Contracts under the New UCT Regime
The ‘small business’ threshold has significantly broadened under the New UCT Regime. Previously, a contract would be considered a ‘small business contract’ where:
- at least one party to the contract had less than 20 employees; and
- the upfront price payable under the contract did not exceed $300,000; or
- the contract duration was for greater than 12 months and the upfront price payable did not exceed $1 million.
Under the New UCT Regime, a ‘small business contract’ exists where:
- a party to the contract has less than 100 employees (including casual and part-time employees so long as they are employed on a regular and systemic basis); or
- has an annual turnover of less than $10 million.
What is an unfair term?
An unfair contract term is one that:
- causes a significant imbalance in the rights and obligations of the parties;
- is not reasonably necessary to protect the legitimate interests of the party seeking to rely on it; and
- causes financial or other detriment to one party if the other party seeks to rely on it.
Further, this may include terms that enable one party (and not the other) to:
- avoid or limit their obligations under the contract;
- terminate the contract;
- penalise the other party for breaching or terminating the contract; or
- vary the terms of the contract.
Imposition of penalties under the New UCT Regime
Previously, the Court only had the power to declare an unfair contract term void and unenforceable.
Under the New UCT Regime, however, the Court can in addition to declaring an unfair contract term void, impose penalties for proposing, applying or relying on such a term, with each unfair term within a contract being considered a separate contravention.
Where an unfair contract term is found to be proposed, applied or relied on, the penalties imposed can be:
- for an individual, up to $2.5 million; or
- for a company, up to the greater of:
- $50 million;
- 3 times the value of benefit from the contravention; or
- where benefit cannot be determined, 30% of adjusted turnover during the breach turnover period.
Under the New UCT Regime, there are clearly significant financial risks should an unfair contract term be found to exist within one of your contracts.
Come see us for a review
Following the expansion of the scope of unfair contract terms and introduction of the Court’s ability to impose substantial penalties under the New UCT Regime, now is the time to have your standard terms and conditions, and the procedures by which they are implemented, reviewed to ensure they comply.
If you need support to reduce your risk of breaching the new UCT Regime or believe you are party to a contract with an unfair contract term, please reach out to our Litigation + Dispute Resolution team for advice tailored to you, your business and contracts.
For further information please contact Harrison Humphries