Unfair Contract Terms – Drastic changes are on their way!

From November 2023, our unfair contract terms regime will change, applying to more contracts than ever. Here’s what you need to know.

By John Christian – October 18, 2023
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If you’ve been pretty confident that your contracts are in good order, it might be time to take a second look. From 9 November 2023, Australia’s unfair contract terms (UCT) regime will change, applying to a much larger group of contracts. And that might mean yours.

So what are these changes, and how will they apply to you? And, most importantly, what do you need to do to be compliant with the updated UTC regime?

Table of Contents

  1. What are unfair contract terms?
    a. Examples of unfair contract terms
  2. Changes to Australia’s UCT regime
    a. Contracts now covered by the UCT regime
    b. Who will be impacted
    c. Penalties for non-compliance
  3. Ensuring you’re in compliance with the new UCT regime

What are unfair contract terms?

unfair contract terms imbalance - Victor Legal

Understanding unfair contract terms can be a bit of a tricky thing. Essentially a term in a contract will be considered unfair if it:

  • ‘would cause a significant imbalance in the 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’ (Commonwealth of Australia).

Of course, in practice, this means that every term has to be considered both by its strict terms and in light of the parties to the contract themselves. So a term that might be perfectly fair for one party, might be considered to be unfair by a different party.

Examples of unfair contract terms

Examples of the types of terms that are likely to be considered unfair are:

  • Automatic renewal terms, where one party can renew the contract without giving the other party notice.
  • Unequal termination payment terms, where one party can terminate in much greater circumstances than another party.
  • Unilateral variation terms, where one party can vary terms of the contract without agreement by the other party.

Changes to Australia’s UCT regime

The Australian Federal Parliament recently passed significant amendments to the UCT regime through the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (Cth). These changes will come into effect on 9 November 2023, and all Australian businesses will need to be compliant from that date.

These most recent changes essentially broaden the scope of the UCT regime, so that it captures a much larger pool of contracts and protects a larger group of Australians overall.

Contracts now covered by the UCT regime

The most important question for you is whether or not your contracts will now be covered by the expanded UCT regime.

Standard form contracts for consumers and small businesses

In general, the unfair contract terms regime will now cover standard contracts where one party is a consumer or a small business. This is to account for the relative bargaining power of those entities.

The amendments also increased the definition of a ‘small business’ expanding it to cover businesses whose turnover is less than $10 million or who have less than 100 employees. The amendments also expanded what is captured within a ‘standard form contract’ to include contracts that are lightly negotiated.

While it’s not completely straightforward, it’s important to note that the new UCT regime might apply even when the small business is sophisticated or experienced. And it will always apply when the contract is for the purchase or supply of goods or services (i.e., one party is a consumer).

Who will be impacted?

lmost any business could be impacted by these changes, and it’s important that everyone – regardless of your industry – takes a look at the new requirements with the help of your contracts lawyer.

However, some types of contracts that could be particularly impacted are:

  • construction contracts, especially between contractors and subbies
  • contracts for works
  • terms of trade contracts
  • contracts for the supply of services ancillary to the main business operations, such as cleaning or maintenance
  • retail leases
  • software user agreements
  • business loan agreements
  • high cancellation cost contracts, such as gym contracts
  • contracts with obscured extra fees, such as cell phone agreements

Penalties for non-compliance

If your contract falls under the new UCT regime, then there are serious penalties for non-compliance. You can be caught up in this if you propose, apply, rely or purport to apply or rely on an unfair contract term. And, importantly, you can be penalised from the time you offer a client a contract that contains an unfair contract term, not just from the time the contract is executed and in force.

Under the new regime a penalty could be applied that is the greater of:

  • $50 million
  • Three times the value of any benefit obtained (if any)
  • 30% of the body corporate’s adjusted turnover during the breach period

This could be financially devastating for many businesses, so it’s really important that you understand the terms of your contract and ensure they are fair for each and every party that you contract with – even if you’re using standard forms without amendment. In practice, the ‘unfairness’ depends on the other party not only on the contract.

Ensuring you’re in compliance with the new UCT regime

With the changes to the UCT regime coming up quickly, now is the time to act. The ACCC has indicated that it will be prioritising the enforcement of these expanded rules and that it expects businesses to fully comply with their obligations from 9 November 2023 onward.

Your next step should be to review your standard form contracts – whether they’re with suppliers, customers or subcontractors – to ensure that you’re not unwittingly utilising any unfair contract terms. And if you do find any compliance risk, make changes to both the terms and the processes you have for negotiating those terms accordingly.

At Victor Legal we can help you make those assessments and amendments as necessary. We have experience with the new UCT regime and an in-depth understanding of how that applies to our clients. We can help you ensure that the terms of your agreement are both fair and best market practice.

Contact us today!

Article by John Christian, Principal Lawyer, Founder and Director of Victor Legal

John has extensive experience in complex civil and commercial dispute resolution and litigation matters, specialising in:

Building and construction disputes
Complex litigation
Contract drafting and review
Dispute Resolution
Commercial Law
Corporate insolvency
Securities and caveats
Debt collection
Contract disputes
Commercial and risk mitigation advice

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