Unfair terms in a contract: How will the new laws affect my business?

Unfair terms in a contract: How will the new laws affect my business?

In November 2023, new laws will come into force regulating unfair contract terms 

The next stage of legal reforms to unfair contract terms (UCT) will come into force on 10 November 2023. Although the laws are broad, the Government hopes they will improve small business and consumer confidence in contracting. Find out what amounts to unfair terms in a contract and how to prepare your business. 

What are unfair terms in a contract?

UCTs are defined in the Australian Consumer Law (ACL). The ACL is part of the Competition and Consumer Act.  

A UCT is a term of a consumer contract that:

  • Causes a significant imbalance in the parties’ rights and obligations under the contract; 
  • Is not reasonably necessary to protect the legitimate interests of the party that benefits from the term; and
  • Would cause detriment (financial or otherwise) to a party if it were relied upon. 

If a Court is asked to decide whether there are unfair terms in a contract, it must also consider:

  1. Whether the term is transparent; and 
  2. The contract as a whole. 

What are the UCT reforms?  

The UCT reforms are the result of legislation that was introduced to trigger a suite of amendments to the Competition and Consumer Act.  

The incoming reforms include: 

  • The expansion of the small business definition to capture more small business contracts. 
  • A strict prohibition against unfair contract terms and new penalties imposed where the prohibition is breached. 
  • Greater clarification around the meaning of standard form contract and the circumstances in which it will exist.
  • Greater powers to the Court, including:
    • the power to impose an injunction against a respondent;
    • precluding UCT terms in future contracts; 
    • restraining respondents from applying or relying on a similar UCT term in any existing contracts. 

The expanded UCT regime will apply to standard form consumer contracts and small business contracts that are either:

  1. Entered into from 10 November 2023; or 
  2. Renewed or varied from 10 November 2023. 

Broader coverage through expanded definitions

The definition of small business contract has been expanded so that more contracts fall within the scope of the UCT legislation. The new definition of a small business contract is a standard form contract: 

  1. That is for the supply of goods or services, or a sale or grant of an interest in land; and
  2. Where at least one party either:
    1. employs fewer than 100 persons (up from 20 employees); or 
    2. has an annual turnover of less than $10 million during the previous income year. 

The reforms have lowered the employee threshold and removed the requirement to consider the upfront price payable under a contract. It means that the regime will offer protection to more small businesses. 

What’s already changed?

Some reforms are already in effect. They include increased penalties for businesses engaging in anti-competitive conduct under the CCA. The maximum penalties have increased five-fold to the greater of: 

  • $50 million (up from $10 million); or 
  • Three times the value derived from the relevant breach; or 
  • 30% of the company’s turnover during the period it engaged in the conduct (if the value of the breach can’t be ascertained). 

New prohibitions and penalties for unfair terms in contracts 

One of the most significant changes is the new prohibitions and penalties for companies that continue to include UCT in their standard form small business contracts. 

Previously, courts were only empowered to declare UCTs void rather than having the power to impose penalties for UCT breaches. In a practical sense, critics argued that this meant the regime was largely “toothless” in nature and failed to adequately deter parties from engaging in misconduct. 

Under the new regime, there are express prohibitions against the purported or actual inclusion, application or reliance on UCT. Courts are now empowered to impose significant pecuniary penalties for contraventions to deter businesses by hitting them in the hip pocket.

Importantly, businesses should be aware that each term of a standard form contract will be assessed for its compliance with the legislation and attract its own penalty. It means a party can be found to have multiple contraventions within a single contract. This legislative change is intended to ensure that offending parties are adequately deterred from contravening the regime with the knowledge that with each contravention, the penalties will increase substantially. 

Clarification of the scope of standard form contracts 

The reforms also clarify the circumstances when a standard form contract will be found to exist. Previously, when assessing whether a standard form contract existed, the Court was to consider whether:

  • One party was required to reject or accept the terms of the contract in its existing form; and 
  • Another party was given the opportunity to negotiate the terms of the contract. 

Under the new regime, the Court may find a standard form contract exists despite a party having had the opportunity to:

  • Negotiate minor or insubstantial changes to a contract; or
  • Select a term from a range of options determined by another party; or 
  • Negotiate terms of another similar or proposed contract. 

The Court must also consider whether a party has used the same or similar UCT before. 

How can I prepare? 

You need to act before the 10 November 2023 deadline to review your current contracts for compliance with the regime. The key factors to consider are whether:

  • Your business meets the definition of a small business; 
  • The contract is standard form; and
  • The contract contains any UCTs.

We recommend seeking help from our commercial team to check for unfair terms in your contracts. Contact us today to find out more.

This article was written by Evelyn Zeglinas and Rebecca Cameron.