New Changes to Unfair Contract Terms Could Impact Your Standard Form Agreements

03/10/23

Long awaited reforms to Australia’s unfair contract terms laws come into effect in November making it an offence to enter into a standard form consumer or small business contract that contains an ‘unfair term’.

Businesses should be aware that the risks associated with using standard form contracts to conduct business in Australia are set to significantly increase.  Major changes to Australia’s unfair contract terms laws (UCT laws) under the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) take effect from 9 November 2023.

The reforms overhaul the existing UCT regime by substantially expanding its application to a wider range of contracts, introducing financial penalties, and granting courts a range of other remedies.

In summary, from 9 November 2023 proposing, using or relying on unfair contract terms in standard form contracts will be prohibited and penalties for breaches of the law will apply.

Expansion of UCT application

A threshold change to the existing laws is the significant expansion of the regime’s coverage, resulting from broadened definitions of both ‘small business’ and ‘standard form contract’.

Under the new UCT laws, a small business need only meet one of the following criteria:

  • having fewer than 100 employees; or
  • having a turnover of less than $10,000,000 in its last financial year.

Previously, the threshold was that at least one of the parties had fewer than 20 employees, and that the value of the contract was less than $300,000, or $1,000,000 for contracts with a term longer than 12 months. There is a no longer a maximum contract value.

The existence of a ‘standard form contract’ has been clarified and will consider the following indicators:

  • 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.

The following factors may be disregarded by a court when deciding whether a party was able to genuinely negotiate a contract:

  • instances where a party has negotiated minor or insubstantial changes to the terms of a contract;
  • instances where a party may only select from a pre-determined range of terms; and
  • whether another party (or small subset of consumers or small businesses) to a similar contract was given an opportunity to negotiate the terms of that contract.

In other words, the opportunity to negotiate must be more than merely ‘token’.

Common standard form contracts

Businesses using standard terms should be aware that UCT laws may apply when using a standard from contract for the purchase or supply of goods or services, regardless of whether the dealing is with a sophisticated or experienced small business.

Key industries in Newcastle and the Hunter, such as mining, manufacturing, and defence are likely to be particularly impacted, as the changes will encapsulate business-to-business transactions in those industries which are often characterised by 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.

Unfair terms

While the new legislation will not impact how an ‘unfair term’ is determined, it is important for businesses to understand the types of provisions likely to be found unfair.  A term of a standard form contract will be unfair if the term:

  • 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
  • causes financial or other detriment to a party if applied or relied on.

Courts, generally, will determine whether a term is unfair on a case-by-case basis; however, in a recent case involving Fujifilm, the Federal Court provided the following guidance on the types of terms likely to be found ‘unfair’:

  • Automatic renewal: Party A is able to renew the contract for a further period unless Party B gives notice to cancel, and Party A has no obligation to notify Party B of the upcoming renewal;
  • Disproportionate termination: Party A may more readily terminate the contract than Party B;
  • Liability limitation: Party A benefits from limited, reduced or capped liability and exclusions for consequential loss without mutual provisions benefitting Party B;
  • Indemnity: Party A is entitled to payment from Party B for all costs and expenses incurred by Party A on a full indemnity basis with no obligation to minimise its costs, and no mutual rights exist for Party B;
  • Termination payment: Party A is entitled to a payment from Party B when Party B chooses to exercise its right to terminate the contract, including payments for the remaining term of the contract where Party A would suffer no loss;
  • Unilateral variation: Party A may vary terms of the contract (including pricing) without the consent or approval of Party B; and
  • Incorporation by reference: Party A incorporates additional terms or documents by reference which are not accessible to Party B, and which may be unilaterally varied by Party A with no obligation to provide notice to Party B.
Penalties

Under the current regime, the primary adverse consequence of a finding that a contract contains an unfair term is the inability to enforce or rely on that term, with the consequence that a business might reasonably decide to ‘take the risk’ of including such terms in their standard form contracts.

The nature of the risk is changing significantly – in addition to an unfair contract term being 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.

The maximum pecuniary penalty for an individual will be $2.5 million.

Other remedies

In addition to higher maximum penalties, the courts have expanded powers to provide other remedies such as:

  • 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.
What this means for business owners

The use of standard form contracts or standard terms and conditions of supply or purchase remains a legitimate, and arguably essential, tool for businesses of all sizes for many of their day-to-day business interactions.  Similarly, it is not unreasonable or unlawful for a business to seek to protect its interests.  However, as a consequence of the new UCT regime, businesses must take a more considered approach to the use of these tools.

Given the expanded definition of ‘small business’ now encompasses approximately 99% of Australian businesses, we recommend that all businesses implement a review process for their contracts prior to the 9 November 2023 effective date of new UCT laws.

We recommend that businesses be proactive in reviewing their suite of standard contracts in order to identify which may fall within the newly extended class of standard form contracts. Each identified standard form contract should be carefully reviewed to identify any contract terms that could be considered ‘unfair’.  Potentially ‘unfair’ terms will need to be assessed, taking into consideration any imbalance in the rights of the parties, what may be reasonably necessary to protect legitimate interests, and any detriment, financial or otherwise, that could result from reliance on the terms.

Small businesses should also be aware that the new UCT Laws may offer some leverage when negotiating contract terms, even with counterparties who are also small businesses.  A ‘take it or leave it’ approach will be significantly riskier.

CONTRIBUTORS

This article was co-written by Associate, Reid Farrell.

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.