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Substantial changes to the Unfair Contract Terms regime

By Greg Palumbo & Colin Yuan

• 20 December 2022 • 8 min read
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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.

To recap, the UCT laws will 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.

Following the passage of the UCT Reform Bill, the ACCC has substantially more power to enforce the UCT laws (under the Competition and Consumer Act 2010, including the Australian Consumer Law (CCA)). Accordingly, 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 coming changes, which become effective next year on 9 November 2023.

Key changes to the UCT laws (explored in this article below) include the following:

    1. under the CCA, proposing, applying or relying upon UCTs in a standard form contract is prohibited
    2. the maximum penalties for civil contraventions (including the use or enforcement of UCTs) are significantly increased
    3. expanding the number and type of small businesses to which the UCTs apply
    4. clarifying (and arguably broadening) the interpretation of a standard form contract, and
    5. expanding the mechanisms which a Court can utilise in enforcing the prohibition of UCTs.

With respect to timing, whilst the UCT Reform Bill came into effect on 10 November 2022, the changes to the UCT regime (1) will not be effective until 09 November 2023 (including with respect to any penalties in connection with the use or enforcement of UCTs) and (2) do not apply retrospectively to existing contracts (i.e., those contracts already executed prior to 09 November 2023). That said, it is worth noting that the increase in penalties with respect to contraventions under the CCA (other than in connection with the use and enforcement of the UCTs) became effective on 10 November 2022.

1. Prohibition of UCTs

Once the full scope of the UCT Reform Bill applies, proposing, applying or relying on UCTs will be expressly prohibited. Prior to passage of the UCT Reform Bill, UCTs have not attracted penalties and the only consequence for using or relying on UCTs was that the UCT could be declared void by a Court if determined to be unfair.

2. Maximum penalty increases

For companies, the maximum penalty under the CCA has increased to the greater of:

  • $50 million
  • three times the value of the benefit obtained, or
  • if the court cannot determine the value of the benefit obtained – 30% of the companies’ adjusted turnover during the breach turnover period for the offence.

The Table below compares the previous and current maximum penalties under the CCA.

Previous penaltyCurrent Penalty
$10 million$50 million
The greater of:Three times the value of the benefit obtained, orThree times the value of the benefit obtained, or
If the value cannot be obtained, 10% of the annual turnover of the company and its related bodies corporate.If the value cannot be obtained, 30% of the adjusted turnover of the company and its related bodies corporate during the breach turnover period for the offence.*

*The new maximum penalties introduce the terms ‘adjusted turnover’ and ‘breach turnover period’. ‘Adjusted turnover’ refers to the sum of the value of all the supplies that the body corporate (and any related body corporate) has made or is likely to have made during the breach turnover period (other than a few identified exceptions). ‘Breach turnover period’ refers to the duration of the breach which is, at a minimum, a 12 month period over which the penalty is calculated.

3. Expansion of small business contract threshold

The definition of a ‘small business contract’ (which is one of two forms of standard form contracts which can contain UCTs, the other being consumer contracts) has been expanded to capture a larger number of small businesses. A contract is a ‘small business contract’ if:

  • the contract is a supply of goods or services, or a sale or grant of an interest in land, and
  • at least one party to the contract is a business that (1) employs fewer than 100 persons and/or (2) has a turnover for the last income year of less than $10,000,000.

Notably, prior to the passage of the UCT Reform Bill, an agreement was considered a ‘small business contract’ if one party employed fewer than 20 persons and the upfront price payable under the contract was either (1) for contracts with a term of up to 12 months, less than $300,000 or (2) for contracts with a term of more than 12 months, less than $1,000,000.

4. Standard form contracts

The UCT Reform Bill also specifies 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.

5. Expanded Court-mandated enforcement mechanisms for UCTs

Under the UCT framework prior to the passage of the UCT Reform Bill, the primary consequence for the use of UCTs was that the UCTs would be voided by a Court. In addition to this remedy, the UCT Reform Bill also allows a Court:

  • to void the entirety (or any relevant part) of the contract
  • to vary the contract to remove the UCT, or
  • to refuse to enforce the UCT.

Importantly, these specific changes can affect a commercial arrangement beyond the UCTs themselves and potentially have broader commercial ramifications.

What should businesses be doing, and what can you expect?

As businesses have less than a year until all of the changes under the UCT Reform Bill apply, businesses should:

  1. conduct a mapping exercise to identify what contracts used with either consumers and/or small businesses would be classified as a ‘standard form contract’;
  2. review and update their standard form contracts as a matter of priority; and
  3. educate relevant stakeholders on the application of the changes under the UCT Reform Bill.

Given the ACCC’s long-standing advocacy for UCT reforms, its active stance in this space (including recently with Fujifilm (which we have previously covered here) and Maxgaming) and its announcement that the protection of small businesses is one of its 2022-23 official priorities, businesses should expect that the ACCC will be particularly active in enforcing and prosecuting businesses for the use of UCTs.

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By Greg Palumbo & Colin Yuan

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