As the end of the year draws closer, changes to the existing unfair contract terms (UCT) regime under the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (Cth) will take effect on 10 November 2023. Under the new UCT regime, it will be unlawful to include or rely on an unfair term in a standard form contract that is a consumer contract or a small business contract:
- entered into from 10 November 2023; or
- renewed or varied from 10 November 2023.
The primary aim of these changes is to strengthen consumer protections by addressing unfair terms in standard form contracts. Standard form contracts are those that are offered on a ‘take it or leave it’ basis, where the consumer has little or no opportunity to negotiate the terms.
What is an Unfair Term?
A term of a standard form consumer or small business contract is unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the terms; and
- it would cause financial or other detriment to the other party if relied on.
Terms must be reviewed on a case-by-case basis taking into account the context and there is not currently much case law in the area for guidance. However, some potentially unfair terms with broad effects include but not limited to:
- Automatic renewal terms:
- Automatic rollover of the contract for a further period without notice.
- Unilateral rights for one party to extend a contract an unlimited number of times.
- Unilateral variation terms
- A term/s that allows one party (but not the other party) to vary the terms of the contract.
- Unfair payment term
- Right to unilaterally vary fees.
- Requirement for prepayment, no ability to get refund for unused services/products.
- Incorporation by reference
- When one party incorporates into the contract additional contractual terms by reference to extraneous documents which are difficult for the other party to locate and identify, such as Head Contracts.
- Imbalanced termination rights
- Unilateral rights to immediately suspend performance of a contract for any reason without notice.
- Unilateral termination for convenience rights.
- One-sided limitation of liability or indemnity terms
- Broad/unreasonable list of excluded heads of loss (e.g. excluding liability for one party’s wilful default or negligence).
- Terms which significantly limit, reduce or cap one party’s liability and exclude claims for consequential loss without providing corresponding rights to the other party.
- One-way indemnity for breach of contract / risks outside the indemnifying party’s control.
Changes to the UCT Regime
There is no contract value threshold. The UCT regime will apply to all standard form contracts regardless of the value of the contract.
Critically, the definition of what is a small business (who has the benefit of the protections) has been expanded to include businesses that:
- employ fewer than 100 employees (replacing the current threshold of 20 employees); or
- had less than $10 million in annual turnover in the previous income year.
This amendment significantly increases the scope of businesses that will be protected by the UCT regime.
The significance of these changes is unprecedented such that contract terms and risk allocation that have been used in Australia for the past 30+ years with “small businesses” will now be illegal with significant penalties applying for non-compliance.
The construction and infrastructure sector is likely to be impacted, as the changes will greatly increase the coverage of business-to-business transactions including most contracts between head contractors and subcontractors, works contracts and agreements for supplies. For cases of egregious non-compliance, the Australian Competition and Consumer Commission (ACCC) may investigate and take enforcement action against the offending party. This could result in substantial fines, injunctions, or court orders, further impacting the company’s operations and finances.
We expect there will be more litigation in the area and with it, further guidance on when a term is unfair under the UCT regime. It would of course be preferable not to get caught up in UCT disputes so ensuring compliance with the amended regime will be essential.
Increased Penalties
The Act has increased the maximum penalty for breaches of the UCT legislation which are extremely significant for corporations and individuals:
| Where the Contravening Party is… | Existing Civil Penalties | New Civil Penalties |
| A Corporation | The greater of:· $10 million;· Three times the value of the benefit obtained; orWhere the value of the benefit cannot be determined, 10% annual turnover in the 12 months preceding the act or omission. | The greater of:· $50 million;· Three times the value of the benefit obtained; orWhere the value of the benefit cannot be determined, 30% of the adjusted turnover during the breach turnover period for the act or omission. |
| An individual | $500,000 | $2.5 million |
Next Steps
The Act has had the dual impact of giving the UCT regime a broader application and introducing substantial penalties and enforcement action for failure to comply with the UCT regime.
Furthermore, developers and/or builders must ensure that their contracts are written in clear and plain language to enhance transparency and understanding of the other party. Any ambiguities or hidden clauses that may mislead the counterparty can now lead to significant consequences.
In light of these penalties, developers (particularly non-EBA) and builders must proactively review and amend their suites of standard form contracts to align and ensure compliance with the revised UCT regime taking effect on 10 November 2023. KCL Law has been discussing the significant changes under the UCT regime with clients with a view to amending new (or varied) contracts so that they are ready for November.
Stay compliant and protect your projects by getting your standard form contracts reviewed by our team of experienced lawyers to ensure compliance with the latest legislative changes, so you can focus on what you do best – building with confidence.
More information
For information about this matter, please contact:
Damien Simonetti, Principal Lawyer
Construction and Infrastructure
(03) 8600 0708 or dsimonetti@kcllaw.com.au
Taslyn Govender, Lawyer
Construction and Infrastructure
(03) 8600 8893 or tgovender@kcllaw.com.au
Author
This article was authored by Taslyn Govender, Lawyer of KCL Law.
Note: This update is a guide only and is not intended to constitute legal advice.