In November 2023, changes to the law on Unfair Contract Terms (UCT) came into effect.
UCTs create an unreasonable imbalance of power between contracting parties. Australian law now strictly prohibits UCTs where one party to the agreement is a consumer or small business.
The changes expanded the classification of a ‘small business’ and introduced significant penalties for using unfair terms in standard form contracts. Additionally, the changes provide further detail about what constitutes a ‘standard form contract’.
Before these changes, businesses may have been informed that the UCT laws did not apply to their business contracts. However, the changes may have shifted that position and your contracts may need re-assessing under the new regime.
This article looks at the reformed UCT legislation in Australia. We will explore the new laws, how and when they apply and the consequences non-compliance. Remember, it’s always important to consult with an expert contract lawyer to avoid breaking the law.
What are the current UCT laws?
The ASIC Act 2001 (Cth) (ASIC Act) and the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law) set out the UCT laws. These laws protect consumers and small businesses from experiencing unfair terms in standard form contracts.
The ASIC Act governs contracts for financial products and services. The Australian Consumer Law applies to consumer and small business contracts (excluding those related to financial products or services).
Under the Australian Consumer Law, a person (or business) breaches the UCT laws if:
- they make a contract; and
- the contract is a consumer contract or small business contract; and
- the contract is a standard form contract; and
- a term of the contract is unfair; and
- they propose, apply or rely on the unfair term.
Comparable rules apply under the ASIC Act. Further, the contract continues to bind the parties if it is capable of operating without the unfair term.
These changes apply to:
- standard form contracts made or renewed on or after 9 November 2023; and
- a term of a contract that is varied or added on or after 9 November 2023.
Importantly, where a term of a contract is varied or added on or after 9 November 2023, the changes will apply to the whole contract.
The ACCC urged “While some of the changes won’t apply to contracts until they are renewed, or a new contract is entered into, businesses should be proactive in reviewing their standard form contracts now.”
What is a standard form contract?
Typically, a standard form contract is created by one person without allowing the other person to negotiate. An agreement is likely to be a standard form contract if:
- one party has all or most of the bargaining power relating to the transaction;
- one party has created and agreed a substantially similar contract with another party;
- one party prepared the contract before any discussion relating to the transaction occurred between the parties;
- one party was required to accept or reject the contract terms as provided;
- one party was not given an effective opportunity to negotiate the contract terms; or
- the contract terms are not tailored to the specific characteristics of each party or the particular transaction.
This type of contract is often used repeatedly and generally offered on a ‘take it or leave it’ basis.
Businesses that prepare their own contracts (without legal input) can run the risk of breaching the UCT laws.
What is a consumer or small business contract?
Consumer contract: 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 for personal, domestic or household use or consumption.
Small business contract: A contract is a small business contract if the contract is for a supply of goods or services, or a sale or grant of an interest in land and at least one party to the contract satisfies either one or both of the following conditions:
- one party employs fewer than 100 people at the time of the contract; and/or
- one party has an annual turnover of less than $10 million (for the previous income year).
A business counts the overall number of employees by referring to:
- the number of employees at the time the contract was entered into;
- any casual employees (but only if they were employed on a regular and systemic basis); and
- excluding any employees of any related businesses.
Further, under the ASIC Act, the UCT regime will only apply to a small business contract if the upfront price payable (excluding interest) for the contract is $5 million or less. The Australian Consumer Law previously included a contract price component, but it has now removed it.
What exactly is an unfair contract term?
Under the UCT laws, there is a three step test to determine whether a contract term is unfair. Under this test a term is considered unfair if:
- it would cause a significant imbalance in a parties rights and obligations under the contract; and
- it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
These factors are judged from the context of the contract as a whole and not always as an individual clause.
Importantly, each clause that is determined to be an unfair term forms a separate contravention (and is subject to cumulative penalties).
Examples of terms that are unfair
In our experience, common unfair contract terms include one-sided rights in the contract. For example, contract terms that are likely to be considered unbalanced and unfair allow one party (and not the other) to::
- avoid or limit their performance in the contract;
- vary the contract (e.g. the quantity or quality of the contracted goods or services);
- suspend or terminate the contract;
- enforce compliance obligations or penalties under the contract;
- set exorbitant non-refundable fees under the contract;
- automatically renew the contract (without notice, fee negotiation or termination options); and
- assign the contract to the detriment of another party (without consent).
Further, both the Australian Consumer Law and the ASIC Act set out some examples of unfair contract terms.
A business enters into a two-year contract for Internet services. Under the terms of the contract, the Internet service provider has the right to change its prices or services without notice. However, the business does not have the right to terminate the contract even if the Internet Service Provider (ISP) significantly increases the price.
This term is likely to be unfair because it allows the ISP to unilaterally increase the price, thus changing one of the most essential terms of the contract.
A business enters into a two-year waste disposal contract. The contract provides that the supplier may terminate the contract by giving 30 days’ notice. Another term of the contract provides that if the contract is terminated, the business must pay the supplier compensation equal to the service fees for the remaining term of the contract.
The term requiring the business to pay compensation is likely to raise concerns under the unfair contract terms regime. Such a term allows the supplier to effectively penalise the business in the event of termination, even if the supplier terminates without cause. It is unlikely that such a clause is necessary to protect the provider’s legitimate interests.
Moreover, the fairness of the term must be assessed in light of the contract as a whole, including any other terms that may offset the unfairness of the term. For example, additional benefits offered to the other party may outweigh a potentially unfair term. This means that a term may be unfair in one contract but not in another.
What happens if a contract includes unfair terms?
The changes to the UCT laws have significant implications for Australian businesses. Businesses must avoid suggesting, using, or relying on any terms that may be considered unfair. Businesses who contravene the UCT laws may face legal action and reputational damage.
The party disadvantaged by the unfair term can seek legal action through the courts. If a term is determined to be unfair, the court has the power to make a range of orders, including:
- imposing significant penalties;
- declaring all or part of the contract unenforceable;
- requiring the business to modify the contract; and
- ordering refunds of money, return of property or ordering the provision of services to the affected party, at the businesses expense.
For these reasons, it’s important to consult with a commercial contract lawyer early in the contract process.
Businesses that try to enforce unfair contract terms are at risk of damaging their reputation. A business’s actions, together with what others say about business greatly affects a businesses reputation.
Businesses with a good reputation attract better talent and can be perceived as more valuable for their products and services. If a business uses unfair contract terms, it may damage its reputation in the marketplace and create a poor consumer experience.
How can I make my terms fair?
Clauses can be constructed fairly and in accordance with UCT laws in a number of ways.
Sometimes, changing or softening the language in an unfair contract term can be enough to remove the unfair element of the clause. Alternatively, you might need to incorporate an equivalent term (or right) for the other party, creating a balanced or fair term.
A good commercial contract lawyer will understand this risk and be able to provide you with tailored legal advice for your contract.
The below checklist includes questions you can ask yourself when preparing or reviewing your contract terms for unfair terms:
- Does the contract consider both parties point of view?
- Is the contract clear and transparent?
- Does any term go beyond what is necessary to protect the legitimate interests of the business?
- Would any terms cause unnecessary financial (or non-financial) disadvantages to the other party?
- Do any terms that are ‘on the fence’ have counter-balancing terms?
- Are both parties equally penalised for breach or termination of the contract?
- Can both parties change the terms of the contract?
- Are both parties able to terminate the contract?
- Companies need to review their standard form contracts and ensure that they do not include terms that are unfair
- Small businesses may be excused from complying with a contract term that is not fair
- Small businesses can push back on clauses that are unreasonable
- There are significant penalties for breaching UCT laws
- Ensure your contracts are drafted by an experienced contract lawyer to avoid breaching the law
- Review any existing contract terms that appear to breach the UCT laws
Frequently asked questions
Several changes were implemented when the changes came into effect.
Prior to 9 November 2023:
- UCT laws previously covered less small business contracts (being fewer than 20 employees, or if the upfront price payable for the contract was under $300,000, or $1 million for contracts longer than 12 months).
- The courts could declare specific contract terms unfair and therefore void.
- Proposing, applying or relying on an unfair term was not prohibited. The term was merely severable and unenforceable.
- The courts could not impose penalties on business that included unfair contract terms.
After 9 November 2023:
- UCT laws cover more small businesses (increased to fewer than 100 employees, or have an annual turnover of less than $10 million).
- The contract value threshold was removed under the Australian Consumer Law (still applies under the ASIC Act).
- The courts still can declare specific contract terms unfair and void.
- Proposing, applying or relying on an unfair term is strictly prohibited. The unfair term is still severable (where possible).
- The courts can impose significant penalties on businesses that propose, apply or rely on unfair terms.
Arguably, the previous UCT laws did not prevent parties drafting unfair terms given the consequence was the term being deemed void and unenforceable (without penalty). However, under the new UCT laws, this risk profile has clearly changed for businesses.
The maximum financial penalties for businesses under the new UCT laws are the greatest of:
- $50 million;
- 3 x the value of the “reasonably attributable” benefit obtained from the conduct; or
- if a court cannot determine the benefit, 30% of adjusted turnover during the breach period.
The maximum penalty for an individual is $2.5 million.
Businesses can still provide contracts on a ‘take it or leave it’ basis if the other party is not a small business or consumer. Contract negotiations are crucial to mitigate any unfair contract term risks. If providing standard form contracts, those agreements should not include clauses that may be unfair and in breach of the UCT laws.