Heavy penalties imposed on Businesses under reforms to the Unfair Contract Terms Regime

Commercial, Construction

The Commonwealth government has made sweeping changes to the Unfair Contract Term regime (UCT regime) imposed under the Australian Consumer Law by introducing the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth).

These changes will come into effect on 9 November 2023 and are intended to crack down on anti-competitive conduct affecting consumers and small businesses, by imposing harsh penalties on parties that use unfair terms in contracts.

In this article we have unpacked who the UCT regime applies to, what the relevant changes to the UCT regime are, the legal ramifications of breaching the UCT regime, and the steps businesses should take to minimize their risk.

What is a ‘Consumer Contract’ and ‘Small Business Contract’?

A ‘consumer contract’ is a contract for the supply of goods or services or a sale or grant of an interest in land to an individual for their personal, domestic or household use or consumption.

Under the amendments to the UCT regime, a ‘small business contract’ is a contract for the supply of goods or services or sale of grant of an interest in land, where, at the time the contract is entered into:

  • at least one party to the contract is a business that employs fewer than 100 persons; and/or
  • at least one of the party’s turnover for the last income year is less than $10,000,000.

Standard Form Contracts

The UCT regime applies to consumer contracts and small business contracts which are determined to be ‘standard form contracts’. The reforms apply to new standard form contracts and any existing standard form contracts which are renewed or any term which is varied after 9 November 2023.

A contract is presumed to be a standard form contract unless the advantaged party can prove otherwise.

What is a ‘Standard Form Contract?’

The ACL doesn’t clearly define what a ‘standard form’ contract is, however, section 27 provides that the court will take the following factors into account when determining if a consumer contract or small business contract is a ‘standard form contract’:

  • whether there is an imbalance in bargaining power;
  • Whether the contract had been pre-prepared by the advantaged party prior to any discussion relating to the transaction taking place;
  • Whether the disadvantaged party was required to either accept or reject the contract? (ie, ‘take it or leave it’);
  • whether there was a sufficient opportunity to negotiate the terms of the contract;
  • whether the terms of the contract take into account the specific characteristics of another party or the particular transaction;
  • any other matter prescribed by the regulations.

Further, the amendments to the UCT regime provide that even if there were negotiations between the parties, a contract may still be determined to be a standard form contract despite there being an opportunity for:

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

Some examples of contracts which might fall into the category of a ‘standard form contract’, depending on the circumstances, may include any pre-prepared or ‘cookie cutter’ terms & conditions, supply agreements, subscriptions and terms of membership, building or construction contracts, or loan and mortgage documents, etc which were pre-prepared, provided on a ‘take it or leave it’ basis with little room to negotiate any material terms of the contract.

What’s an Unfair Contract Term?

Under section 24 of the ACL, a term of a ‘standard form’ consumer contract or small business contract is considered unfair if that term meets the following criteria:

  • It would cause a significant imbalance in the rights and obligations of the parties under the contract.
  • it is not reasonably necessary to protect the legitimate business or financial interests of the party who would be advantaged by the term. It is for the advantaged party to rebut this presumption.
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on by the advantaged party.

This is determined by the court on a case by case basis, taking into consideration:

  • the extent to which the term is transparent (ie, whether the term is expressed in reasonably plain language, legible, presented clearly, and readily available to any party affected by the term); and
  • the contract as a whole.

The UCT regime would likely deem the following examples of terms to be unfair:

  • terms which permit one party (but not the other party) to:
    • avoid or limit performance of the contract (eg, suspending works for any reason without notice);
    • terminate the contract (eg, terminating the contract for any reason);
    • vary the terms of the contract (eg, varying without giving the other party sufficient notice or an opportunity to terminate before the variation takes effect);
    • renew or not renew the contract (eg, automatic renewal of the term giving the other party sufficient notice or an opportunity to terminate);
    • vary the upfront price payable under the contract without the right of another party to terminate the contract;
    • vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
    • determine whether the contract has been breached or to interpret its meaning;
    • assign the contract to the detriment of another party without that other party’s consent;
  • terms which penalise one party (but not the other party) for a breach of termination of the contract (eg, exit fees);
  • terms which limit:
    • one party’s vicarious liability for its agents (eg, imbalanced or unreasonable limitation of liability clauses);
    • one party’s right to sue another party (eg, imbalanced or unreasonable limitation of liability clauses);
    • the evidence one party can adduce in proceedings relating to the contract;
  • terms which impose the evidential burden on one party in proceedings relating to the contract; or
  • terms of a kind prescribed under the regulations.

Penalties for using a UCT

Currently, the court has the authority to make orders rendering a UCT void and unenforceable. From 9 November 2023 the court may also:

  • Impose significant monetary penalties on the individual or company who propose, apply, rely, or purport to apply or rely on, a UCT. For individuals, the maximum penalty will be $2.5million. For companies, the maximum penalty will be the greater of:
  1. $50 million;
  2. Three times the value of the UCT’s benefit (if the court can determine it); or
  3. 30% of the corporation’s adjusted turnover during the breach turnover period (minimum of 12 months),
  • Make orders to redress any loss or damage caused by a UCT and to prevent or reduce loss or damage that is likely to be caused by a similar UCT in another existing contract.
  • Issue an injunction to prohibit an individual or a company from using contracts containing similar UCTs or relying on a similar UCT in an existing contract.
  • Issue public warning notices against offenders (ie, naming and shaming).
  • Disqualify offending people from managing a company.

Please note that each unfair term in a contract will be considered a separate offence which may attract its own penalty, meaning that a single contract may incur multiple penalties.

Key Takeaway

Given the UCT regime is introducing substantial penalties for using unfair contract terms, it is important that businesses take preventative measures now to review and amend their contract terms and avoid any repercussions. These new laws will apply to new standard form contracts and any existing standard form contracts which are renewed or any term which is varied after 9 November 2023.

If you are unsure whether you need implement any changes before 9 November 2023, please contact our commercial team. We would be happy to advise:

  1. whether the UCT regime applies to you;
  2. whether you are likely to have any standard form contracts which contain unfair terms; and
  3. what you need to do to minimize your risk.