Expansive changes to the unfair contract terms regime (UCT regime) have come into effect prohibiting the use and reliance on unfair contract terms in standard form contracts, with significant penalties for breaches.
The prohibition on businesses from proposing, using, or relying on unfair contract terms in standard form contracts with consumers (including businesses that meet the new definition of ‘small businesses’) came into effect on 9 November 2023. This prohibition applies not only to standard form contracts that are entered into on or after 9 November 2023, but also standard form contracts which are renewed or varied on or after this date.
Standard form contracts (such as Terms & Conditions) are commonly used for the supply of goods or services and are seen across many industries. Now more than ever, these “take it or leave it” agreements should be prepared (or, if pre-existing, reviewed) to ensure they don’t fall foul of the legislation and open the door to substantial penalties.
What is an unfair contract term?
The UCT regime only applies to standard form consumer or small business contracts. It is therefore important to understand what consumer contracts and small business contracts are, and what makes them standard form.
Consumer Contract: A consumer contract involves the supply of goods and services or a contract for the sale or grant of an interest in land to an individual for wholly/predominately personal, domestic or household use or consumption.
Small Business: The definition of small business – and hence who can rely on the UCT regime protections – has now been expanded to apply to contracting parties that employ fewer than 100 employees or have an annual turnover (based on its last income year) of less than $10 million.
Standard Form: There is a presumption that a contract is a standard form contract unless the other party proves otherwise. Various factors are taken into account in order to determine if a contract is a standard from contract, including:
- bargaining power;
- whether one of the parties has made another contract on the same or substantially similar terms, and if so, how many such contracts have been made;
- whether one party was required to accept terms as presented; and
- the opportunity to negotiate and whether the contract considers the specific characteristics of the other party or the transaction.
Unfair: Under the UCT regime, for a term to be considered unfair, it must meet the following criteria:
- Cause significant imbalance in the parties’ rights and obligations;
- Not be reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- Cause detriment to a party if it were applied or relied on.
What to look out for
While not exhaustive, the following is a list of terms which may be considered unfair:
- Termination: rights of the supplier (but not the customer) to terminate for convenience or disproportionate termination terms
- Variation: terms allowing the supplier only to vary the terms (this could pertain to payments, goods, services and more)
- Renewal: automatic renewal provisions
- Limitation of Liability: one-sided indemnities
Previously, unfair terms in contracts were deemed to be void and unenforceable. However, now unfair contract terms are in fact prohibited and attract significant pecuniary penalties.
It is important to note that multiple contraventions may arise from one contract as each unfair term is a separate contravention.
For body corporates, the maximum pecuniary penalty per contravention is the greater of:
- $50 million
- Three times the value of the benefit received; or
- 30% of the adjusted turnover of the breaching party during the breach period.
For individuals, the maximum penalty is $2.5 million.
The UCT Regime is now here, and with broader scope and bigger consequences, businesses must carefully examine their contracts in light of the legislative amendments to unfair contract terms. We encourage our clients to have their existing supply documents reviewed to ensure they are compliant.
For more information about contract terms, please contact Daniel Kovacs, Principal Lawyer on (03) 8600 8859 or email@example.com.
Article written by Daniel Kovacs, Principal Lawyer & Gabriella Lloyd, Lawyer