Unfair contract terms (UCT) laws are set to change from 9 November 2023, following the assent of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (‘the Act’). Significant increases to penalties were introduced for businesses who include or rely on an unfair term within a contract. The upcoming UCT laws apply to small business contracts, where at least one party of the contract is a small business, and standard form contracts entered into or renewed after 9 November 2023. The expansion of UCT laws to a larger scope of contractual agreements mean Australian businesses should begin reviewing the contractual agreements they have in place.
WHAT ARE THE CHANGES?
Expansion of defining a 'small business'
Prior to the new UCT laws, a business would be classified as a ‘small business’ if it employed fewer than 20 people. This requirement has increased to a business employing fewer than 100 people or an annual turnover of less than $10 million.
Defining a 'standard form contract'
The UCT laws provide additional guidance for Courts to determine a ‘standard form contract’. Where a contract has been duplicated across customers with analogous terms, it may be considered a ‘standard form contract’. For example, this may include a lease or a services agreement.
The upcoming changes indicate that the Court should not give weight to whether the customer had the option to negotiate minor changes to terms or whether a party from another contract could negotiate its terms. Businesses should take time to review how these changes may impact contracts which weren’t considered standard form previously.
The 'unfairness' test
A determination of what constitutes ‘unfairness’ will be evaluated by the Court in terms of the contract read as a whole and the transparency of the term used. Australian Consumer Law (ACL) defines an unfair contract as one which:
- is not reasonably necessary to protect the legitimate interests of the party disadvantaged.
- would cause a significant imbalance to the parties’ obligations arising from the contract.
- would cause detriment (financial or otherwise) to a party if it were to be relied on.
Terms which the ACL (Schedule 2, section 25) considers unfair include a term which:
- permits one party to limit performance of the contract.
- allows one party (but not the other) to terminate the contract.
- penalises one party (but not the other) for breach of contract.
- allows only one party to vary the terms of the contract.
- allows one party (but not the other) to renew or not renew the contract.
- Allows only one party to determine if the contract has been breached.
For example, if a particular lease was considered a ‘standard form contract’, an unfair term may be a clause where the landlord does not give you notice before taking possession of the property or a clause which allows the landlord to carry our repair and maintenance at the expense of the tenant without stating that the costs should be reasonable.
Other examples, which may be considered ‘unfair’ include:
- an automatic renewal period which is extremely long –
- an indemnity for a loss which cannot be prevented by the defaulting party.
- a term which limits one party’s right to sue.
- ability to unilaterally vary product.
Heightened Penalties
Prior to the assent of the Act, there were no monetary penalties available if a contractual term was found to be unfair. However, the Act has now increased the penalties for unfair contractual terms. These include:
Corporation
- $50 million
- 30% of adjusted turnover during the breach
- Three times the value of the benefit obtained.
Individual
- $2.5 million
Enforceability
The addition of pecuniary penalties will resultantly give the Court greater power to enforce breaches for relying on unfair contractual terms. As such, it is likely that ASIC and ACCC will see the prohibition of UCT as a core priority.
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*This article is not intended to provide legal advice. Please contact our office to discuss your specific circumstances.