A Refresher on Unfair Contract Terms and Their Impact on Standard Form Contracts

To qualify as a small business under UCT laws, only one of the following criteria needs to be satisfied:

• having fewer than 100 employees; or
• having a turnover of less than $10,000,000 in the last financial year.
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Further, the following indicators can be used to identify the existence of a standard form contract:

• there is an inequality of bargaining power;
• the contract is pre-prepared;
• the terms are offered on a ‘take it or leave it’ basis;
• there is a limited effective opportunity to negotiate terms;
• it is a commonly used contract; and
• the terms are not specific to the parties’ circumstance.
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The UCT laws particularly impact key industries in Newcastle and the Hunter, such as mining, manufacturing, and defence as parties often engage in transactions involving contracting and sub-contracting arrangements for consulting and other services, works contracts, and the supply and purchase of goods, materials and equipment, all with the potential to involve small businesses and standard forms.

Under section 12BG of the ASIC Act and section 24 of the ACL, a term in a standard form contract will be unfair if:

• it 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 who would be advantaged by the term; and
• it causes financial or other detriment to a party if applied or relied on.
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Section 24 of the ACL was interpreted shortly after UCL laws came into force by the High Court of Australia in Karpik v Carnival plc (2023) 98 ALJR 45 (Karpik). This decision stated that determining the existence of the detriment requires more than a hypothetical case to be made out by the claimant. However, the claimant does not need to prove actual detriment or that the term has been enforced.

In determining whether a term is unfair, its transparency must be considered. Karpik made clear that this is not a separate inquiry from whether the term is unfair under section 24 of the ACL. Accordingly, it was stated that “the greater the imbalance or detriment inherent in the term, the greater the need for the term to be expressed and presented clearly”.

Karpik’s interpretation of the ACL has been subsequently applied in cases concerning section 12BG of the ASIC Act in the Federal Court of Australia. See ASIC v Auto & General Insurance Company Ltd [2024] FCA 272 and ASIC v H C F Life Insurance Company Pty Ltd [2024] FCA 1240.

In addition to a contract term that is found to be unfair becoming automatically void, significant pecuniary penalties may apply to any person or business that includes, proposes or relies on an unfair contract term up to a maximum which is the greater of:

• $50 million;
• three times the value of the benefit obtained (if determinable); or
• 30% of the adjusted turnover during the period of the breach.
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The maximum pecuniary penalty for an individual is $2.5 million.

Other remedies include:

• orders to prevent or reduce loss or damage that may be caused by the term;
• orders applying to any existing contracts containing terms similar to one declared unfair, regardless of whether those contracts are before the court; and
• injunctions to prevent the use of contracts containing terms similar to one already declared unfair.
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If businesses haven’t already conducted a review of their standard contracts, it is imperative they do so to ensure they do not contain any terms which could be considered unfair. If a term, which appears to be unfair, is identified, it should be assessed taking into consideration any imbalance in the rights of the parties, what is reasonably necessary to protect legitimate interests, and any detriment, financial or otherwise, that could result from reliance on the terms.

On the flip-side, small businesses should also be aware that UCT Laws may offer some leverage when negotiating contract terms, even with counterparties who are also small businesses.  Certainly, a ‘take it or leave it’ approach is now significantly riskier.

This article was co-written by Cristina Davey, Law Graduate.

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  Please contact us if you require advice on matters covered by this article.