Businesses using standard form contracts — including trading terms and conditions, online click-through agreements and independent contractor agreements that are not routinely negotiated — are at risk of breaching strengthened unfair contract term (UCT) laws under the Australian Consumer Law (ACL) which came into force on 9 November 2023.
While the UCT regime has applied to standard form contracts since 2011, the reforms have, among other things, significantly broadened the scope of contracts to which the UCT laws apply and introduced penalties for using or relying on unfair contract terms.
What is a standard form contract?
A standard form contract is one that is prepared by one party without the other party having an effective opportunity to negotiate its terms, or one that issued repetitively to multiple parties on a ‘take it or leave it’ basis.
A standard form contract can be either a consumer contract or a small business contract.
A consumer contract concerns 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 is an individual.
A small business contract is where at least one party employs 100 or less persons or has an annual turnover of less than $10 million.
Prior to the recent changes, a small business contract was one which had an upfront price of less than $300,000 or a duration of more than 12 months and an upfront price of up to $1,000,000.
The new definition of small business contract will mean many more contracts will fall within that definition and become subject to the new laws.
What is an unfair contract term?
A term is unfair if it satisfies the following 3 limbs:
- it causes significant imbalance in the parties’ rights and obligations arising under the contract; and
- is not reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
- it causes detriment (financial or otherwise) to a counterparty if it were to be applied or relied on.
This means each term which may potentially breach the UCT regime needs to be considered in the context of the contract and the circumstances of the contracting parties — there is not a ‘one-sized fits all’ approach to determining if a clause is a UCT.
However, the ACL does provide a number of non-exhaustive examples of UCTs. UCTs generally permit one party (usually the supplier of goods and/or services), but not the other (usually a consumer/small business) to:
- avoid or limit their obligations under the contract (including under indemnity or limitation of liability clauses);
- terminate the contract;
- vary the contract terms;
- renew or not renew the contract;
- vary the price payable without termination from the counterparty; and
- unilaterally determine whether the contract has been breached or interpret its meaning.
Key changes
In addition to the expansion of the definition of ‘small business contract’, the key changes to the UCT are as follows:
- UCTs are now unlawful — it will be an offence to enter into a standard-form contract that contains an unfair term or seek to rely on an unfair term in a standard form contract;
- the definition of ‘standard form contract’ has been expanded to include contracts where the other party is provided with an opportunity to negotiate insignificant changes or to choose from a range of specified options;
- the Courts now have the power to impose pecuniary penalties of up to $2.5 million (for individuals) and for 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.
Timing
The strengthened UCT laws will apply to standard form contracts entered into or varied from 9 November 2023. Existing contracts which are in place as at 9 November 2023 will remain subject to the old UCT regime.
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.
What do you need to do?
We have been working with clients to identify their existing standard form contracts and to review, amend and improve their contracts to ensure compliance with the new reforms.
We also can carry out internal compliance training for businesses.
The seriousness of the penalties for non-compliance means businesses who use standard form contracts simply cannot afford to ignore these changes.
Contact us
For more information on the UCT regime and to discuss your requirements, please contact a member of our Corporate & Commercial team.
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