Navigating the changes to unfair contract terms
From 9 November 2023, Australia’s unfair contract terms (UCT) regime will undergo significant changes aimed at protecting small businesses and consumers from unfair contract terms in standard form contracts.
As the changes will come into effect within the next 2 months, businesses should review their standard contracts to ensure compliance with the updated UCT regime.
- What is a Standard Form of Contract
A standard form contract is a set of terms and conditions that is issued on a repetitive basis to multiple people. This can include:
- Terms and conditions governing the services your business provides to customers
- Contracts between head contractors and sub-contractors
- Agreements for maintenance work
- Terms and conditions between your business and a manufacturer or supplier of goods
- Business loan agreements
- Software user agreements
Please note that the above are just examples of a standard form contract as there is no blanket rule defining a standard form contract. Whether an agreement is a standard form contract is fact-dependent and up to the Courts to decide.
In deciding whether a contract is a standard form contract, a court may consider a range of relevant matters and must take into account whether:
- One of the parties has all or most of the bargaining power in the transaction
- The contract was prepared by one party before any discussion occurred between the parties about the transaction
- The other party was, in effect, required to accept or reject the terms of the contract in the form in which it was presented
- The other party was given an effective opportunity to negotiate the terms of the contract
- The terms of the contract consider the specific characteristics of the other party in the particular transaction
- What is an Unfair Term?
The changes to the UCT regime have not altered the test for ‘unfairness’. A term in a standard form contract is considered unfair if:
- It causes a significant imbalance in the parties’ rights and obligations.
- It is not reasonably necessary to protect the legitimate interests of the advantaged party.
- It would cause detriment (financial or otherwise) to a party if applied or relied on.
The Australian Consumer Law does not provide a predefined list of “unfair” terms but does offer a list of clauses that may be considered unfair. The assessment of whether a term is “unfair” is case-specific.
- Changes to the UCT Regime
- Expanded coverage: The expanded UCT regime will apply to standard consumer contracts and small business contracts entered into, renewed or varied from that date.
- Increased penalties: The maximum penalties for breaches of the Competition and Consumer Act 2010 (Cth) will be increased and can reach up to and $2.5 million for an individual and $50 million for a body corporate.
- UCTs are illegal: It will be illegal to propose, apply or rely on a UCT in a contract. This marks a significant shift as Courts were previously limited to declaring specific contract terms as unfair and void whereas Courts will have the power to impose penalties as a result to the changes to the regime.
- Broader definition of small business: The UCT regime will now extend its protection to small businesses with an annual turnover of less than $10 million or fewer than 100 employees. This change expands the scope of businesses protected by the UCT regime.
- Changes to Assessment of ‘Standard Form Contracts’: Previously, if the other party had the opportunity to negotiate minor changes or select multiple options, then the contract would not be considered a standard form contract. However, now with the changes to the UCT regime, it is likely that even if the counterparty had an opportunity to negotiate minor boilerplate provisions but was informed that certain items were non-negotiable (for example, a liability position), the contract would be considered a standard form contract and can be considered unfair.
- Expanded Court power: Courts will be empowered with more authority to injunct individuals or businesses from making future contracts containing UCTs and/or impose appropriate orders to address loss or damage caused by UCTs.
- Common examples of unfair contract terms and how to mitigate
Scenario 1: Imbalanced termination rights
You have a standard contract with a commercial property owner to provide building maintenance services. The contract contains the following clauses:
- The property owner has the authority to suspend your electrical services without prior notice for any reason.
- The contract grants the property owner the unilateral right to terminate the agreement at their convenience, without cause.
- If you terminate the contract prematurely for any reason, you are exposed to a significant termination charge, which will be financially burdensome for your business.
You can mitigate this UCT by seeking a revision of the contract to only permit suspension where there are material breaches of contract to ensure fairness in performance interruptions. Another strategy would be to introduce a mutual termination clause that allows both parties to terminate the contract with reasonable notice and valid reasons. This strategy ensures that termination rights are not one-sided and that both parties have a reasonable notice period to avoid abrupt disruptions.
Scenario 2: Unilateral variation terms
You recently signed a standard contract with a commercial property owner for cleaning services. The contract contains terms that allow your company to unilaterally change your service fees and mandates that your cleaning services must be prepaid with no options for customers to receive refunds for unused services, even if circumstances change.
Under the new changes, this imbalance could be considered unfair. As such, you may need to revise the contract to provide a fair exit clause for your client in case of substantial changes and/or require customer consent for variations. You may also wish to consider introducing notice periods and/or a refund policy that provides customers with the opportunity to receive a partial or full refund for prepaid services that were not utilised. These provisions ensure fairness and flexibility in financial transactions.
- What to do next
- Determine if your contract qualifies as a ‘standard form contract’ based on the new assessment factors.
- Review contracts for potential UCTs such as the examples above.
- Undertake meaningful discussions with the other party to ensure you are not artificially negotiating.
- Update your contracts to ensure you are using clear and simple language and avoiding overly broad terms.
Given businesses have been provided more than 6 months to ensure their contracts are compliant before the amendments come into force, it is likely that the ACCC will commence enforcement of the new regime as soon as it comes into effect in November this year.
If you need assistance with proactively reviewing and adjusting your contracts to ensure compliance with the new regulations, you can get in touch with Constructive Legal Solutions at firstname.lastname@example.org.