Clock ticking to review your standard contracts before expanded unfair contract terms regime takes effect
Australian businesses have until 10 November 2023 to review their standard contracts to ensure that they do not contain unfair contract terms, or risk facing substantial civil penalties.
In November 2022, Federal Parliament passed the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Amending Act), which contains substantial amendments to the unfair contract terms regime (UCT Regime) set out in the Competition and Consumer Act 2010 (Cth) (CCA) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
The changes contained in the Amending Act, which come into effect on 10 November 2023, significantly increase the risk profile of small businesses using “standard form” consumer contracts or small business contracts by attaching increased pecuniary penalties to the use of unfair contract terms, and expanding the scope of the UCT Regime generally.
What contracts does the UCT Regime apply to?
The UCT Regime applies to consumer contracts and small business contracts.
A consumer contract is a contract for a supply of goods or services, or a sale or grant of an interest in land, to an individual for personal, domestic or household use.
A small business contract is a contract for the supply of goods or services, or a sale or grant of an interest in land, where at least one party to the contract is a small business and certain monetary thresholds are met (these concepts are discussed further below as they have been addressed in the Amending Act).
In determining whether either of the above contracts are “standard form contracts”, courts will consider a number of factors as set out in the CCA, such as whether one party has all or most of the bargaining power, who prepared the contract and when it was prepared, and whether the consumer was given an effective opportunity to negotiate the terms of the contract.
Effect of the Amending Act
Expanded scope of the UCT Regime – small business contracts
As highlighted above, the UCT Regime applies to standard form contracts under which one party is a consumer or a small business. Currently, the CCA provides that a small business is one which employs fewer than 20 people (including casual employees only if they are employed on a “regular and systematic basis”.
However, under the Amending Act, a small business will be classified as one which employs fewer than 100 people or has an annual turnover of less than $10,000,000.
Additionally, current monetary thresholds applying to small business contracts have been removed by the Amending Act. Currently, a small business contract must have an upfront price payable not exceeding $300,000 (or $1 million if the term of the contract exceeds 12 months), however these thresholds have been completely stripped away by the Amending Act.
The effect of this is that many businesses which are not currently captured by the UCT Regime will be captured as of 10 November 2022.
Expanded meaning of “standard form contract”
In addition to the elements of a standard form contract contained in the CCA (as briefly discussed above), the Amending Act provides further clarity as to when a standard form contract will exist. Particularly, the Amending Act states that a standard form contract may exist despite the existence of any of the following:
- an opportunity for a party to negotiate minor or insubstantial terms of the contract;
- an opportunity for a party to select a term from a range of options determined by the other party;
- an opportunity for a party to another contract or proposed to negotiate the terms of that other contract.
Increased civil penalties and illegality of unfair contract terms
Previously, contractual terms found to be unfair by Courts would simply be deemed void and unenforceable, a risk that some businesses were willing to take. However, from 10 November 2023, businesses are now prohibited from making contracts which contain unfair contract terms, whether or not they are relied upon. Each unfair contract term deemed to exist in a contract is now a separate offence.
The penalties which apply to breaches of the CCA (and now including breaches of the UCT Regime) have also been increased to:
- for a company – the greater of:
- 3 times the value of the benefit obtained and that is reasonably attributable to the breach (or unfair contract term), if that value can be determined; and
- If the value of the benefit cannot be determined 30% of adjusted turnover during the “breach turnover period” (which, at a minimum, will be the period of 12 months ending at the end of the month in which the company ceased committing the offence);
When will a contract term be unfair?
Under the CCA, a contract term will be unfair if the term:
- would cause a significant imbalance in the contracting parties’ rights and obligations arising under the contract;
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The CCA also lists some examples of unfair contract terms, which include terms that permit one party, but not the other, to:
- avoid or limit performance of the contract;
- terminate the contract; or
- vary the terms of the contract.
The list contained in the CCA is far longer and not exhaustive, meaning that the Australian Competition and Consumer Commission may seek to penalise companies for other contractual terms not contained in the listed examples which it deems to be unfair.
What you should do
When the amended UCT Regime becomes effective on 10 November 2023, the potential exposure for businesses will be drastically increased..
If your business utilises standard form contracts, we strongly urge you to seek advice, before the commencement of the amended UCT Regime, as to whether your business could be caught by the UCT Regime, and whether these contracts contain unfair contract terms. Our experienced team of commercial and consumer lawyers can help your business review its current arrangements and ensue that appropriate safeguards are in place.
Should you wish to obtain further guidance, please contact Kale Rigano (Principal, 08 8210 1207 or email@example.com), Marissa Mackie (Principal, 08 8217 1361 or firstname.lastname@example.org) or Alex Belperio (Solicitor, 08 8210 1230 or email@example.com).