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The Unfair Contract Terms regime undergoes reform

Unfair Contract Terms

The Unfair Contract Terms (UCT) regime has undergone a reform, making UCTs illegal and attracting substantial penalties while the class of small businesses that can rely on UCT protection has been expanded.

The UCT law in its previous existence came into effect in 2010 and is contained within the Australian Consumer Law (ACL).

At a recent PASA Connect CPO roundtable, Raihan Hossain Associate at HWL Ebsworth Lawyers explained that the amendments to the UCT regime commenced on 9th November 2023 and apply to contracts entered into after this date.

Proposing, using or relying on unfair contract terms in standard form contracts will be banned and penalties for breaches of the law will apply. 

The reform has also introduced a greater range of standard form contracts.

This means greater care will need to be taken when using standard form contracts, like the Australian Standards, which were drafted before the UCT regime.

What are the changes to small business definitions?

To meet the small business threshold, a small business must either employ fewer than 100 people or have a turnover of less than $10 million for the previous income year. 

Previously, this stood at fewer than 20 employees with casual employees not counting unless employed on a regular and systematic basis.

The upfront contract price payable was also set to under $300,000 or $1 million for contracts lasting more than 12 months.

The value limit of small business contracts has since been removed entirely under the new regime.

What about standard form contracts?

As explained by the Australian Competition and Consumer Commission (ACCC), “Sometimes, a buyer and seller work out terms together before they agree to a contract. But often, a business will use a pre-written contract for all their customers, and the customer can’t change any, or the majority, of the terms of the contract. They can only take it or leave it. This is called a standard form contract.”

Under the UCT regime, a standard form contract is considered unfair if it:

  • causes a significant imbalance in the parties’ rights and obligations
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by such a term
  • would cause detriment to a party if the term were to be applied or relied on

The reform does not change the test for whether a term is unfair.

However, there have been amendments to the considerations a court must have when determining whether the contract is a standard form contract.

Under the new regime, in addition to existing factors, a court will now consider whether the party that prepared the contract has also made other contracts that are the same or very similar and the number of times this has happened.

The ACCC explains that the changes will also make clear that a contract may be a standard form contract despite:

  • the other party having an opportunity to negotiate changes to terms of the contract that are minor or insubstantial in effect
  • the other party being able to select a term from a range of options determined by the party that prepared the contract
  • the party that prepared the contract letting a third party negotiate the terms of a different contract. This means that even if some consumers or small businesses are able to negotiate the terms of a contract that is issued to a broader group of consumers or small businesses, the contract may still be a standard form contract

And the penalties?

Raihan explained to the CPO roundtable that under the new Act, a person breaches a civil penalty provision if they make a contract that is a consumer or small business contract, which is a standard form contract, that includes an unfair term that they proposed.

Each unfair term is a separate breach of the prohibition per the new Act and a person will breach a civil penalty provision if they apply, rely or purport to rely on an unfair term.

The reform states that the maximum financial penalties for businesses are the greater of:

  • $50 million
  • Three times the value of the benefit (if the court can determine the value of the benefit) or
  • 30 percent of the adjusted turnover during the breach turnover period

The maximum penalty for an individual is $2.5 million.

Commenting on the reform in September, ACCC Deputy Chair Mick Keogh said, “The changes to the unfair contract terms laws should motivate businesses to take steps to ensure their standard form contracts are fair, including by removing or amending concerning terms.

“There was previously little motivation for businesses to comply with the law, despite the ACCC’s compliance and enforcement actions. We strongly urge businesses to review their contracts now to ensure they comply.”

He added, “The test for whether a contract term is unfair has not changed. However, businesses now could potentially face substantial penalties for contravening the law. This will better protect consumers and small businesses who have limited bargaining power, expertise and ability to negotiate or assess standard form contracts.”

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