Legal Insights

Coming soon: significant legislative changes to unfair contract term regime — are you ready?

Viviane Karoumbalis

• 29 August 2023 • 7 min read

On 9 November 2023, the amendments to the laws governing unfair contract terms (UCT) come into effect. The changes impact many businesses who previously were not caught by the UCT regime, and introduces significant penalties for non-compliance. All businesses 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.

Therefore it is important for when businesses are preparing or using reviewing agreements that could be standard form contracts to which the provisions apply for us to be very conscious of creating liability for your business.

Application of the UCT laws

The UCT laws apply to terms which are found to be unfair in contracts which are either a consumer contract or small business contract and is a standard form 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 changes clarify 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.

Section 24 of the Australian Consumer Law 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.

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.

Changes made to the UCT Regime

Below is a summary of the changes that we and our clients need to take particular note of. The key change to the UCT regime is that proposing, applying or relying on UCTs will be expressly prohibited.

Overview of changes	Detail
Expansion of the offence	It will be an offence to: enter into a standard-form consumer or small business contract that contains an unfair term; or seek to rely on an unfair term in a standard form consumer or small business contract
Expanded application of the UCT regime to a broader range of contracts	There is no contract value threshold. The UCT regime will apply to all standard form contracts regardless of the value of the contract. The definition of who is a small business (who has the benefit of the protections) has been expanded to include businesses that: employ fewer than 100 employees; or had less than $10 million in annual turnover in the previous income year. Repeat usage of a contract must be taken into account by a court when determining whether a contract is a standard form contract. A contract may still be considered a standard form contract regardless of whether: the parties had an opportunity to negotiate minor changes
Introduction of pecuniary penalties for contravention of the UCT laws	The courts have the power to impose pecuniary penalties for including or relying on an unfair contract term (in addition to the current ability to declare that term ‘void’) The maximum pecuniary penalties per contravention for companies are the greater of: $50 million; three times the value of the benefit (if able to be determined); or 30% of the adjusted turnover during the breach the ‘breach turnover period’, or the previous 12 months, whichever is longer (increasing from 10% of annual turnover in the 12 months prior to the conduct). For individuals involved in the conduct, the maximum penalty will be $2.5 million (up from $500,000).
Further remedies	The courts have expanded powers to provide remedies to address unfair contract terms. The courts may: Make orders to prevent or reduce loss or damage that may be caused by the term. It is not necessary to establish that a person has suffered or is likely to suffer loss or damage. Make orders applying to any existing contracts containing terms similar to one declared unfair, regardless of whether all contracts are put before the court. Issue injunctions to stop the use of contracts containing terms similar to one already declared unfair.

With respect to timing, whilst the UCT Reform Bill came into effect on 10 November 2022, the changes to the UCT regime will not be effective until 9 November 2023 (including with respect to any penalties in connection with the use or enforcement of UCTs) and do not apply retrospectively to existing contracts (i.e., those contracts already executed prior to 9 November 2023). That is, it applies to new contracts made at or after 9 November 2023, including any contracts which are renewed and any term that is varied after 9 November 2023.

It is also worth noting that the increase in penalties with respect to contraventions under the Competition and Consumer Act 2010 (Cth) (other than in connection with the use and enforcement of the UCTs) became effective on 10 November 2022.

Reviewing standard form contracts?

Should you need any assistance in reviewing any standard form contracts or have any questions in respect of the reform, please reach out to your relationship partner or contact us.

Corporate & Commercial