Changes to the Unfair Contract Terms Regime — what it means for developers
The Federal Government recently passed the much anticipated reform of the laws governing unfair contract terms (UCT) through the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth) (UCT Reform Bill). The reforms to the UCT laws follow years of advocacy by the ACCC arguing that the UCT regime did not provide enough of a deterrent for businesses to stop using and relying on UCTs in their standard form contracts, despite UCTs being prohibited since 2010.
The introduction of amendments to competition law under the UCT Reform Bill will impact many developers who previously were not caught by the UCT regime, and introduces significant penalties for non-compliance.
All developers using standard form contracts should be on notice to take the UCT laws seriously and to review and update their standard form contracts ahead of the forthcoming changes, which are effective from 9 November 2023.
Changes made to the UCT Regime
The UCT laws apply to terms which are found to be unfair in contracts which are, (1) either a consumer contract or small business contract, and (2) in a standard form.
The key change to the UCT regime is that proposing, applying or relying on UCTs will be expressly prohibited. Prior to the passage of the UCT Reform Bill, the only consequence for using or relying on UCTs was that the UCT would be declared void whereas the amendments now allow Courts to impose penalties where unfair terms are used.
In addition, the UCT Reform Bill also allows a Court to:
- void the entirety (or any relevant part) of the contract
- vary the contract to remove the UCT, or
- refuse to enforce the UCT.
Introduction of penalties
The use of unfair terms in standard form contracts now attracts new and higher civil penalties.
For body corporates, this will be the greater of $50 million (a fivefold increase from the previous maximum of $10 million), three times the value of the benefit obtained or 30% of adjusted turnover during the ‘breach turnover period’ (increasing from 10% of annual turnover in the 12 months prior to the conduct).
For individuals, the penalties will be $2.5 million (up from $500,000).
The new penalties will apply to any conduct occurring from 10 November 2023, meaning that businesses are now exposed to significantly greater financial consequences if they fail to comply with the Competition and Consumer Act 2010 (Cth) and the Australian Consumer Law (ACL).
Expansion of small business contract threshold
The use of unfair terms in standard form contracts can now be challenged by more small business consumers.
The definition of a ‘small business contract’ has been expanded to capture a larger number of small businesses. Now, contracts for the supply of goods or services, or a sale or grant of an interest in land with businesses which have up to 100 employees or less than $10 million annual turnover are captured.
This means that developer standard form contracts that previously fell outside of the regime are likely to be required to comply with the new prohibitions.
What is a 'standard from contract'?
A contract is a ‘standard form contract’ where, in broad terms, the contract was prepared by the party who has all or most of the bargaining power in the transaction without or before any discussion between the parties about the transaction. There is a presumption that a contract is a standard form contract.
The UCT Reform Bill clarifies that contracts may be determined to be a ‘standard form contract’ despite there being an opportunity for:
- a party to negotiate minor or insubstantial changes
- a party to select a term from a range of options for such term, or
- the parties to meaningfully negotiate the terms of another contract but not meaningfully negotiate the terms of the contract in question.
The purpose of these clarifications appears to be that, when determining whether a contract is a ‘standard form contract’, the Court should not simply focus on whether the contract was in a ‘take it or leave it’ form, but rather whether the party was given an effective and meaningful opportunity to negotiate the contract.
Standard form contracts, such as many contracts of sale, are typically wholly prepared by developers, given on a ‘take it or leave it’ basis and contain extensive terms and conditions.
What is an 'unfair' term?
Section 24 of the ACL sets out that a term of a consumer contract or small business contract is ‘unfair’ if it:
- would cause a significant imbalance in the parties' rights and obligations arising under the contract, and
- is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, and
- would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
In deciding whether a term is unfair, the court will consider the contract as a whole and all the rights and responsibilities for each party under the contract, as well as whether the term is transparent. A term is transparent if it is expressed in reasonably plain language, legible, presented clearly, and readily available to any party affected by the term.
Only courts can make final decisions about whether a contract term is unfair. The court will consider whether any other terms in a contract offset the potential unfairness of a term.
Examples of unfair contract terms include terms that:
- allow one party (but not the other) to avoid or limit their responsibilities under the contract
- allow one party (but not the other) to end the contract
- penalise one party (but not the other) for breaking or ending the contract, and
- allow one party (but not the other) to change the terms or pricing under the contract.
The UCT Reform Bill extends on the existing protections and raises the stakes of non-compliance with competition law. It has created corresponding leverage in the bargaining power of consumers and small businesses who enter standard form agreements.
Developers have less than a year until all of the changes to the UCT Reform Bill apply and should consider identifying what contracts would be classified as ‘standard form contracts’ and updating these contracts as a matter of priority, so that there are none in the market by November 2023. Relevant stakeholders should also be educated on the application of the changes under the UCT Reform Bill.
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