All businesses and organisations now have less than 3 months to review their terms and conditions and any standard form contracts before changes to the Unfair Contract Terms (UCT) regime come into effect.
The changes commence on 10 November 2023, with no grace period. From that date, businesses will be exposed to fines and penalties, may be required to pay compensation, or could or have their contracts declared unenforceable if they propose to use or rely on Unfair Contract Terms. The changes will apply not only where organisations enter into agreements which contain unfair terms in standard form contracts, but also when offering to enter into an agreement containing Unfair Contract Terms.
What will Unfair Contract Terms apply to?
The UCT will apply if one (or both) parties to a contract are a small business and the contract is a standard form agreement.
What is a standard form contract?
Contracts are standard form contracts if they are:
- pro-forma
- generally non-negotiable
- take-it-or-leave-it in nature
What is a small business contract?
- one party has less than 100 employees; or
- one party has turnover less than $10 million.
Even if you are not a small business, it is now far more likely that you will be contracting with one. A “small business” was previously defined as having up to 20 employees, but this will now increase to organisations with up to 100 employees or an annual turnover of less than $10 million.
The new laws will apply to all contracts which fit those criteria.
The ACCC has additionally stated that:
The change to the law will also make clear that a contract may be a standard form contract despite:
- the other party having an opportunity to negotiate changes to terms of the contract that are minor or insubstantial in effect
- the other party being able to select a term from a range of options determined by the party that prepared the contract, or
- the party that prepared the contract letting a third party negotiate the terms of a different contract. This means that even if some consumers or small businesses are able to negotiate the terms of a contract that is issued to a broader group of consumers or small businesses, the contract may still be a standard form contract.”
Which industries will be affected by these changes?
Standard form contracts are used widely in the supply and purchasing of goods and services. Examples may include:
- supply of services
- retail leases
- software licences
- commercial loan agreements
- agreements between head contractors and sub-contractors
What is an unfair contract term?
Contract terms are unfair if the rights and obligations:
- overly favour one party
- aren’t necessary to protect the interests of that party
- have the potential to cause harm to the other party
The type of contract term which courts have previously found to be unfair include:
Automatic renewal terms – Contracts which automatically renew at the end of a term, or which permit one party to renew the contract for a further period unless the other party gives notice, particularly where the first party has no obligation to notify of the renewal.
Disproportionate termination terms – Terms which permit one party to terminate in a wider range of circumstances than the other party.
Liability limitation terms – 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.
Indemnity terms – Terms which require one party to indemnify the other, including where a party is required to pay all costs and expenses incurred by the other party in exercising its rights under the contract on a full indemnity basis, particularly where there is no corresponding right of indemnity, or on the other party to minimise its costs.
Termination payment terms – Terms which require one party to pay the other party upon termination, including payments (or forfeited prepayments) for the remaining term of the contract, where the first party received nothing in return.
Unilateral variation terms – Terms which permit one party to unilaterally vary some terms of the contract including the price. Also, variations to obligations contained in documents other than the signed contract (such as policy changes).
Incorporation by reference – Including additional terms by reference to extraneous documents which are difficult for the other party to identify, and/or which provide a unilateral right to vary without notice of the variation.
What are the consequences?
Any standard form agreement which contains unfair contract terms may leave an organisation exposed to fines and penalties, even before a contract is signed. Contracts may be void and unenforceable, so the other party may be able to ‘get out’ of the contract.
In addition, maximum penalties for breaches of the new laws have increased five-fold to the greater of $50 million, three times the value of the breach, or if the value can’t be determined, 30 per cent of turnover during the period of infringement.
When the law doesn't apply
There are only a limited range of exemptions, including:
- When terms are specifically set out by law
- Company constitutions
- Commercial contracts relating to the shipping of goods by sea.
Don’t leave your organisation exposed. Make sure you regularly review your terms and conditions and any standard form contracts to avoid a potential breach of UCT laws when the changes take place on 10 November 2023. If you require any assistance or are unsure where to start, please contact me on (07) 3224 0261.
