The 12 month grace period to update standard form contracts to comply with the changes to the unfair contract terms regime (new UCT regime) under the Competition and Consumer Act 2010 (Cth) is nearly over. Before 9 November 2023, you need to be ready.
From 9 November 2023, the scope and severity of the penalties for including unfair terms in standard form contracts will change significantly. Because of the changes to what is now considered a standard form small business contract, many contracts that were not previously subject to the Australian Consumer Law will now be captured.
Here’s what you need to do.
- Identify your standard form contracts
Don’t simply include your current suite of standard form contracts, because there are now some new factors that will influence a Court’s finding that a contract is a standard form contract:
- one that is used by a company with several other parties (suppliers, service providers, etc) and contains many of the same provisions each time;
- one that has not been negotiated, or only contains minor or insubstantial changes as a result of negotiation;
- one where the party receiving the contract has the option to select a term from a range of options pre-determined by the other party; and
- one where the receiving party does not have the ability to negotiate terms of the contract.
In addition to this expanded definition, the definition of a small business contract has now changed, so that if either party to the contract:
- employs fewer than 100 people; or
- has an annual turnover of less than $10million,
the contract is a small business contract.
This is a significant expansion of the definition and we expect that the majority of businesses will have at least one supplier, partner or service provider that fits the amended definition – and each contract involving these parties will need to be reviewed in accordance with the new laws.
- Review your standard form contracts to remove or amend any terms that are or could be considered unfair
The definition of an ‘unfair’ term will not change; the same 3 criteria will apply to determine if a term is unfair:
- a term that causes a significant imbalance in the parties’ rights;
- causes detriment to a party if relied upon; and
- is not reasonably necessary to protect a party’s legitimate interests.
However, the treatment of unfair terms will be changed under the new laws. Currently, unfair terms are only considered void, with no financial liability for proposing, using or relying on an unfair term. This is changing, meaning the perceived ‘safety net’ of simply ignoring an unfair term can no longer be relied upon as there are significant penalties for using prohibited unfair contract terms.
Consider who is regularly dealing with standard form contracts and what processes or procedures are in place to have contracts negotiated and approved before being signed. Despite the expanded protection of the new UCT regime, it can be difficult to dispute unfavourable contractual terms in a business context if negotiations have occurred, there has been an opportunity to obtain legal advice and someone authorised has signed the contract.
- If you’re a small business, review any standard form contracts you are party to
Not only should you be reviewing your own standard form contracts to ensure they’re compliant, but also consider if you are now a ‘small business’ and subject to a standard form contract. If so, and the contract will renew after 9 November 2023, you may have recourse against any unfair terms in that contract.
- Understand the new penalties
Instead of being merely void and unenforceable, unfair contract terms are now expressly prohibited, with pecuniary penalties applicable to both corporations and individuals. If your contract term is found to be unfair, a court will have the power to impose a penalty subject to a maximum of:
- for corporations:
- three times the value of the benefit obtained from the unfair term; or
- if this value cannot be determined, 30% of your adjusted turnover during the ‘breach turnover period’.
- for individuals, $2.5million.
In addition, a Court can order the entire contract to be void, unenforceable or varied, and grant an injunction against the liable party from issuing contracts with similar unfair terms in the future.
- for corporations:
If you want to avoid entering into a standard form contract with a potential unfair term, you will need to know:
- what a standard form contract looks like;
- what an unfair contract term looks like (now, with the updated changes to the new UCT regime); and
- who you need to consult before binding your business.
With a short time remaining before the changes take effect, now is a great time to review your existing contracts to ensure they hold up against the new legislation. This includes contracts that will renew for another term after November.