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Playing Fair: What Businesses Need to Know About the Changes to the Unfair Contract Terms Regime
Key take aways
- The changes to the UCT regime will commence on 9 November 2023.
- From that date, the UCT regime will apply to a broader scope of contracts and any non-compliance with the regime will incur significantly increased penalties.
- Businesses that use standard form contracts with consumers and other businesses should review the terms of such contracts to ensure compliance by 9 November 2023.
Current UCT regime
The UCT regime applies to standard form contracts where one party to the contract is a consumer or a small business.
There is no statutory definition for “standard form contracts”. However, they are usually regarded as pre-prepared contracts that are offered on a “take it or leave it” basis, with limited opportunity for a party to negotiate its terms. Gym membership terms and conditions, and airline conditions of carriage are common examples of standard form contracts.
A term is unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations under the contract;
- it is not reasonably necessary in order to protect the interests of the party who would be advantaged by the term; and
- it would cause detriment (financial or otherwise) to a party if it was to be applied or relied on.
The court will take into account various factors to determine whether a term is unfair and this will vary on a case-by-case basis.
Examples of terms that have been held by the court to be unfair include terms which permit one party, but not the other party, to:
- terminate the contract;
- penalise the other party for a breach or termination of the contract, such as by imposing early termination fees or late payment fees; and
- vary the terms of the contract, such as the price payable or the terms of other documents that are incorporated by reference into the contract.
Under the current UCT regime, if a term is unfair, it will be deemed void and unenforceable but no penalties will be imposed.
The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) came into force on 9 November 2022 (the Act). The Act amends the Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to introduce various changes to the UCT regime under the Australian Consumer Law (ACL) and the ASIC Act.
Whilst the Act came into force on 9 November 2022, the changes to the UCT regime under the Act will only commence on 9 November 2023 to allow more time for businesses to review its standard form contracts and make the necessary changes to ensure compliance.
These changes will apply to standard form contracts entered into, or renewed or varied, on or after 9 November 2023.
Key changes to the UCT regime
The Act introduced two new prohibitions on unfair terms, which is where a party:
· enters into a standard form contract containing an unfair term; and
· applies or relies on (or purports to apply or rely on) an unfair contract term in a standard form contract.
Each individual unfair term in a standard form contract will constitute a separate contravention of the UCT regime. There can be multiple contraventions if the same unfair term is applied or relied upon on multiple occasions.
Expanded definition of “small business”
In terms of the application of the UCT regime under the ACL to standard form contracts with small businesses, the Act significantly expanded the definition of “small business” to include businesses with:
· fewer than 100 employees (increased from fewer than 20 employees); or
· an annual turnover of AUD 10 million or less (amended from a AUD 300,000 maximum contract value threshold).
Due to the impacts of inflation, the contract value threshold of AUD 300,000 under the current UCT regime is now considered too low to apply to many of the contracts small businesses enter into. This contract value threshold will therefore no longer apply to the definition of “small business” under the ACL’s UCT regime.
However, if the ASIC Act applies, the maximum contract value threshold for the definition of “small business” will still apply but is increased to AUD 5 million. This threshold must be satisfied in addition to the above two requirements that apply under the ACL’s UCT regime.
Expanded definition of “standard form contract”
When determining whether a contract is a “standard form contract”, the court will need to also consider whether one of the parties has previously entered into standard form contracts on the same or substantially similar terms, and if so, how many times. The more times such a contract has been entered into, the more likely it will be considered a standard form contract.
The court may still consider a contract to be a standard form contract even where:
· a party had the opportunity to negotiate minor or insubstantial changes to the terms of the contract;
· a party had the opportunity to select a term of the contract from a range of pre-determined options; or
· a party to another similar contract had the opportunity to negotiate the terms of their contract.
Increased financial penalties
The Act introduced increased penalties for contraventions to the UCT regime, where unfair contract terms will be rendered illegal and pecuniary penalties will be imposed on individuals and corporations for any contravention.
The maximum penalties for breaches of the UCT regime under the ACL are:
· for a person other than a body corporate, AUD 2.5 million; or
· for a body corporate, the greater of:
· AUD 50 million;
· if the court can determine the value of the benefit obtained – three times the value of that benefit; and
· if the court cannot determine the value of the benefit obtained – 30% of the adjusted turnover during the breach turnover period.
Expanded scope of intervention by the court
Under the current UCT regime, the court may declare an unfair contract term to be automatically void. In addition to that power, the Act empowers the court to also make orders to prevent, reduce or redress loss or damage caused by the unfair term. Such orders include orders to void, vary or refuse to enforce part or all of the contract.
What steps should businesses take?
Businesses will soon be exposed to significant penalties for any contravention of the UCT regime, instead of an unfair term merely being declared void and unenforceable as is the case under the current UCT regime. Businesses will therefore need to be proactive in assessing whether their standard form contracts comply with the changes to the UCT regime.
- review all contract templates used by the business, including contracts used with its consumers and suppliers, to assess whether they fall within the expanded definition of “standard form contracts”;
- assess whether the counterparties to those standard form contracts are consumers or parties with fewer than 100 employees or have an annual turnover of less than AUD 10 million;
- identify terms in the standard form contracts that are at risk of being regarded as unfair, and amend or remove, or seek legal advice, on such terms; and
- take measures to ensure that all staff are trained on the changes to the UCT regime and the consequences of any breach, and ensure that only updated standard form contracts are used by the business.
Contact mdp Law today to discuss your business requirements.
In today’s dynamic business world, it is vital for companies to provide shareholders with clear guidelines and expectations for the operation of the business. A well-drafted shareholders’ agreement is essential in protecting the rights and interests of shareholders, ensuring better corporate governance and minimising the potential for disputes.