Ensuring your business complies with the strengthened unfair contract terms regime

By Michael Nas Michelle Hankey Chloe Placzek

14 August 2024

The Australian Competition and Consumer Commission (ACCC) has again named unfair contract terms (UCTs) as one of its compliance and enforcement priorities for 2024-2025.

With these significant changes to the UCT regime having come into effect on 9 November 2023 via amendments to the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001, it is unsurprising that the ACCC is continuing to focus on compliance with the new laws as a priority in 2024-2025.

In this article, we set out what businesses need to know about:

• the strengthened UCT regime under the ACL;
• when it applies;
• terms that have the potential to be “unfair”; and
• recommendations for businesses.

What businesses need to know

The changes to the UCT regime took effect on 9 November 2023 and apply to all contracts entered into, renewed or varied from 9 November 2023. (Notably, businesses should be aware that these changes apply to contracts that were entered into before 9 November 2023 but have been varied or renewed on or after 9 November 2023, as well as to new contracts entered into from 9 November).

The key changes to the UCT regime which took effect on 9 November 2023 include:

• prohibiting the use of, or reliance on, UCTs (previously, use or reliance on UCTs was not prohibited. However, if a court found a term was “unfair”, that term would be declared void and unenforceable);
• introducing significant financial penalties where the new prohibitions are contravened. A court may order a maximum penalty per contravention of:
  • For corporations – the greater of $50 million, three times the value of the benefit obtained from the contravention or if that value cannot be determined, 30% of adjusted turnover during the breach period; and
  • For individuals – $2.5 million;
• expanding the scope of the contracts that may fall within the UCT regime, by broadening the definition of “small business contract” and clarifying new factors to be taken into account when determining whether a contract is a “standard form contract”; and
  clarifying a court’s power to make orders to void, vary or refuse to enforce part or all of a contract and introducing more flexible remedies.

When does the UCT regime apply?

Under the ACL, the UCT regime applies to “consumer contracts” and “small business contracts” which are “standard form contracts”.

A standard form contract is not defined in the ACL. Generally, it’s a contract offered to another party on a “take it or leave it” basis. The new laws clarify that a contract may still be a “standard form contract” regardless of whether the parties had an opportunity to negotiate minor changes to the contract terms or to choose a term from a range of options determined by the other party.

A small business contract is (for all contracts entered into, renewed or varied from 9 November 2023) a contract for the supply of goods or services (or a sale or grant of an interest in land) where at the time that the contract is entered into at least one party to the contract employs less than 100 personnel or has an annual turnover of $10 million or less.

A consumer contract is a contract for the supply of goods or services, or the sale or grant of an interest in land, to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

Terms that have the potential to be unfair

A term in a standard form small business contract or consumer contract will be unfair only if each of the following criteria are satisfied. The term must:

1. cause a significant imbalance in the parties’ rights and obligations under the contract;
2. not be reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
3. cause detriment to the consumer or small business if the term were applied or relied on.

Examples of terms that may be unfair include:

• a term that penalises one party (but not the other) for a breach or termination of contract;
• a term that permits one party (but not the other) to vary the terms of the contract;
• a term that permits one party (but not the other) to renew or not renew the contract;
• a term that permits one party to vary the upfront price payable under the contract without a right for the other party to terminate the contract; and
• a term that permits one party (but not the other) to renew or not renew the contract.

Recommendations for businesses

The strengthened UCT regime is now in full effect. In light of the expanded scope of the UCT regime and the introduction of significant financial penalties that apply to breaches of the UCT law, businesses should identify whether they use “standard form contracts” under the UCT regime. If so, business should:

1. review all contract templates in use, with a view to amending or removing any contract terms that have the potential to be unfair. All superseded versions of contract templates should be clearly marked as such or removed from general access to prevent future inadvertent use;
2. for existing contracts, monitor contracts with ‘roll over’ or automatic renewal provisions, and ensure these contracts are reviewed for terms that have the potential to be unfair, as the strengthened regime applies to contracts renewed on or after 9 November;
3. consider implementing a process to determine whether a counterparty is a “small business” or “consumer” under the ACL; and
4. if a counterparty is a “consumer” or “small business”, consider whether it is appropriate to give the counterparty an effective opportunity to negotiate the terms of the contract. If this is not feasible, give careful consideration to the terms in the contracts with a view to making the terms balanced and reasonable.

Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.