It’s time to review your standard-form contracts for unfair terms

There is now less than 12 months to review your business’s standard-form contracts for unfair contract terms (UCTs) to avoid contravention of the Australian Consumer Law in Schedule 2 of the Competition and Consumer Act 2010.

This follows the passing of the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022, which received Royal Assent on 9 November 2022 and will bring about significant reform to the UCT regime.

These reforms will:

• make UCTs unlawful;
• broaden the meaning of a ‘small business’ to extend the UCT regime’s coverage;
• expand the scope of a ‘standard form contract’ to include contracts in respect of which there is some opportunity to negotiate; and
• introduce significant pecuniary penalties on individuals and companies.

Businesses should not delay reviewing all standard-form contracts with consumers and small business counterparties to ensure compliance with the new UCT regime.

Existing UCT regime

The existing UCT regime was introduced in 2016 to prevent businesses with a stronger bargaining position from relying on unfair terms in contracts with consumers and/or small businesses.

The UCT regime applies to standard form contracts that are either ‘small business contracts’ or ‘consumer contracts’.

A standard form contract is a contract that has been prepared by one party to the contract (the business offering the product or service) without effective negotiation between the parties.

A standard form contract can include terms and conditions which are typically not negotiated or contracts which are offered on a ‘take it or leave it’ basis.

Generally, consumer and small business contracts are presumed to be standard form contracts unless it can be shown otherwise.

A ‘consumer contract’ is a contract for the supply of goods, services or the sale or grant of interest in land wholly or predominantly for personal, domestic or household use or consumption where at least one party to the contract is an individual.

A ‘small business contract’ is a contract where at least one party to the contract is a small business (employing 20 or less people at the time the contract is signed) and where the upfront contract value is not more than $300,000 (or, if the contract is for a term exceeding 12 months, capped at $1 million).

Under the existing regime, a term of a contract is unfair if the term:

• causes a significant imbalance in the parties’ rights and obligations arising under the contract;
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
• causes detriment (financial or otherwise) to a counterparty if it were to be applied or relied on (detriment can be non-financial e.g. using a counterparty’s personal data, or a limitation on a party’s legal rights to sue).

UCTs are generally terms that permit one party (usually the supplier of goods and/or services) but not the other (usually a consumer or a small business) to:

• avoid or limit their obligations under the contract;
• terminate the contract;
• penalise for breach or termination of the contract;
• vary the terms of the contract;
• renew or not renew the contract;
• vary the price payable without the counterparty being able to terminate; and
• unilaterally determine whether the contract has been breached, or to interpret its meaning.

UCTs are not currently unlawful and there are no pecuniary penalties for the inclusion of UCTs under the present regime, but they may be deemed void by a Court or tribunal. In practice, the regime relies on consumers and small businesses being aware of their rights and being willing and able to enforce them.

Recent examples of UCTs falling foul of the regime

Some of the more recent high-profile examples of terms which have been found to be in contravention of the UCT regime include:

Maxgaming

In September 2022, and following an investigation by the Australian Competition and Consumer Commission, Maxgaming (a wholly-owned subsidiary of Tabcorp Holdings) provided a Court-enforceable undertaking to amend potentially UCTs in its standard form contacts with small business gaming venues. The term of the contract rolled over without notice to the customer, allowing Maxgaming to increase the fees payable if equipment required upgrading without the customer’s consent, and excluded Maxgaming from liability for negligent or wilful acts.

Fujifilm Business Innovation Australia (formerly Fuji Xerox Australia)

In August 2022, the Federal Court declared 38 terms used in Fujifilm’s software and printing small business contracts to be void and unenforceable including terms providing for automatic renewal, excessive exit fees and unilateral price increases.

UCT reforms

The key changes to the UCT regime introduced by the Bill will:

• make UCTs unlawful and give Courts more flexibility to vary or refuse to enforce contracts in order to prevent or reduce loss or damage in relation to the UCT;
• expand the definition of ‘small business’ to those with less than 100 employees (casual employees are counted if employed on a regular and systematic basis and part-time employees are counted as a fraction of full-time equivalent) or an annual turnover of less than $10 million. This will mean that many more contracts will become small business contracts and subject to the UCT regime;
• amend the definition of ‘standard form contract’ to include contracts where the other party is provided with an opportunity to negotiate insignificant changes, to choose from a range of specified options, or for a party to a different contract to enter negotiations in respect of the terms of the other contract;
• give Courts the power to impose pecuniary penalties to:
  • individuals of up to $2.5 million; and
  • companies, the greater of:
    • $50 million; and
    • if the Court can determine the value of the benefit obtained from the contravention — 3 times the value of the benefit derived from the contravention of the UCT; or
    • if the Court cannot determine the value of the benefit — 30% of the company’s annual turnover for the 12-month period prior to the contravention;

for each unfair term in the same contract;

• remove the requirement for the upfront price payable under a contract to be below a certain threshold; and
• exempt certain clauses that include ‘minimum standards’ or industry-specific requirements contained in legislation.

What do you need to do?

It is imperative that businesses that routinely use standard form contracts — including standard terms of sale and purchase, app licensing terms, leases, loan agreements or standard purchase order terms — to identify, review, amend and improve their contracts to ensure that they comply with the upcoming reforms to the UCT regime. Failure to do so can carry serious and costly consequences.

How can we help?

Our Corporate & Commercial lawyers can assist with reviewing and, if necessary, redrafting of contracts to ensure compliance with the UCT regime. We also can carry out internal compliance training for businesses.

For more information on the UCTs regime, and to discuss your requirements, please contact Julia Cameron, Partner on (03) 9321 7807, or a member of our Corporate & Commercial team.