Changes to unfair contract terms
Since 9 November 2023, important amendments to unfair contract terms have taken effect (UCT). The changes were introduced by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Act) to the Competition and Consumer Act 2010 (Cth) (CCA) and to the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
Overview of the new regime:
- New rules apply to standard form small business contracts entered into, renewed, or varied on and from 9 November 2023;
- the definition of ‘standard form contract’ is broadened; and
- enhanced consequences and penalties for including UCTs in standard-form contracts.
Revised definition of ‘small business contract’ under the CCA
A small business contract under the CCA is:
- a contract for a supply of goods or services, or a sale or grant of an interest in land; and where;
- one of the parties:
- employs fewer than 100 people; and/or
- had an annual revenue in the previous financial year of less than $10 million.
Revised definition of ‘small business contract’ under the ASIC Act
A small business contract under the ASIC Act is:
- a contract where the upfront price is less than $5 million; and
- where one of the parties:
- employs fewer than 100 people; and/or
- had an annual revenue in the previous financial year of less than $10 million.
Identifying standard form contracts
A standard-form contract usually contains some or all of the following characteristics:
- The provisions in the contract create an imbalance in the parties' rights;
- The contract is prepared in advance;
- The contract is offered on a ‘take it or leave it’ basis;
- The terms of the contract are not specific to the parties’ circumstances; and
- The contract is often used in a party’s business as a way to minimise transaction costs.
The court now has a limited discretion in assessing whether a contract is standard form
If a contract is being challenged on the basis that it is a standard form contract with UCTs, the court's first question to answer is whether or not the contract is a standard form contract.
In the past, the court could declare a contract to not be a standard form, if one or more of the following factors were present:
- A party had the opportunity to negotiate changes;
- A party had the opportunity to select terms from a range of options; and
- A party had the opportunity to enter into another contract or negotiate the terms of another contract.
Under s42 of the Act, the court may declare a contract to be standard form despite the existence of one of the above factors.
In addition, the court will consider (amongst other things) whether a party was able to reject or accept the terms of a contract in the presented form and whether a party was given sufficient time to negotiate the terms of the contract.
What could be considered unfair contract terms?
The Australian Competition and Consumer Commission (ACCC) is responsible for enforcement and over the last few years they have challenged terms that have a similar character to the below, for being unfair.
Description
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Terms that could be UCTs
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Possible mitigators to UCTs
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| Automatic renewal terms |
Terms that automatically renew contracts without notice. |
Obligations to notify of upcoming renewal with the parties consenting to renewal. |
| Imbalanced rights of parties in relation to termination |
A party has the unilateral right to suspend the contract without notice;
A party has the unilateral right to terminate the contract for convenience;
A party has the right to charge excessive termination charges.
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Making these terms mutual to the parties, providing adequate notice periods and not including charges that are not justifiable. |
| One-sided limitation of liability or indemnity |
A term that gives one party a low liability threshold;
A term that does not cap a party’s liability of loss;
A term that provides only an indemnity for one party.
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Have the liability thresholds align with the fees paid under the contract.
Have both parties' liability capped under the contract.
Having mutual indemnities under the contract. |
| Unilateral variation |
Reserving the right to unilaterally vary fees and charges;
Reserving the right to unilaterally vary trading terms and conditions. |
Include a party’s written consent to changes to the contract and provide the option to cancel the contract if they are not agreeable to the amendments. |
Penalties for non-compliance
There are severe penalties for including unfair contract terms in standard-form contracts. Under the new regime, each individual UCT will be considered a breach and could result in a separate fine for each breach.
The maximum penalty for each UCT will be the greater of:
- $50 million;
- 3 times the value of the benefit (if the court can determine the value of the benefit); or
- 30% of the adjusted turnover during the breach turnover period (if the court cannot determine the value of the benefit).
Conclusion
The reforms came into effect from 9 November 2023 and raised the stakes for businesses using standard-form contracts. If you are using any standard form contract, we recommend getting in touch with someone from our team so we can conduct a review of your contract.
