Overhaul of Australia’s unfair contract terms laws – including new penalty regime for businesses seeking to rely on them
On 9 November 2022, the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 received royal assent meaning that changes to Australia’s unfair contract terms laws (UCT Laws) proposed under that bill (UCT Amendments) will take effect from 9 November 2023. As such, businesses have until that date to ensure their contracts comply.
What types of contracts are covered?
The UCT Laws apply to ‘standard form contracts’ to which one or more of the parties is considered a ‘small business’. The intention of the UCT Laws is to provide statutory protection to small businesses from unfair contract terms in standard form contracts that they may feel compelled to enter into without the opportunity to negotiate meaningful amendments given the disparity in bargaining power.
There are many factors to consider when determining whether a contract is a ‘standard form contract’ but generally these are contracts that are frequently used, pre-prepared contracts that are presented on a ‘take it or leave it’ basis without any meaningful opportunity to negotiate. Types of contracts that commonly fall under this category include:
standard supply contracts for goods and services;
software user agreements and licences;
franchise agreements; and
retail leases.
A contract will be considered a small business contract where one of the parties:
has less than 100 employees; or
an annual turnover of less than $ 10 million.
It is important to note that under the new regime, the value of the contract / contract price does not matter.
Given the expansive definition of a small business contract, it is likely that the vast majority of standard form contracts will now be caught by the UCT Laws.
What is an ‘unfair term’?
A term is 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.
Having regard to the above, the following types of terms may be considered ‘unfair’:
a term that gives a part the unilateral right to vary a term;
terms providing for the automatic renewal of contracts without consent of the counterparty;
indemnities, termination rights, liability limitation clauses etc. (particularly where only one contracting party has the benefit of that clause); and
terms that incorporate other terms by reference (without providing full and fair disclosure of those additional terms).
New penalty regime
Currently, where a Court finds that a term is ‘unfair’ it is limited to declaring that such term is void and unenforceable. Once the UCT Amendments become effective, a Court is also able to impose civil penalties if a person proposes, applies, relies upon or purports to apply or rely upon an unfair contract term. These penalties are as follows:
For companies, the greater of:
o $50 million;
o three times the value of the benefit to the company if determinable; or
o 30% of the company’s turnover during the offence period.
For individuals, $2.5 million.
When are the UCT Amendments effective?
The UCT Amendments will become effective on 9 November 2023. The amendments will not apply retrospectively but will apply in respect of new contracts, renewals or variations to existing contracts entered into after 9 November 2023.
Next steps
Businesses using standard form contracts will have up until 9 November 2023 to ensure their contracts comply with the UCT Laws as amended by the UCT Amendments. We recommend that businesses undertake a review of any contract that may be ‘standard term’ to ascertain whether any unfair terms exist and if so, take steps to amend those terms in light of the UCT Amendments.
Should you require assistance and practical guidance in relation to your standard form contracts, our team of dedicated contract lawyers will be happy to assist.