The tiger’s grown some teeth! New laws for unfair contract terms – less than 1 month away and counting.

In a month’s time, new laws governing unfair contract terms (UCT laws) will commence. From
9 November 2023 it will be unlawful for businesses to propose or rely on unfair terms in standard form small business contracts or consumer contracts.

Previously considered a toothless tiger, the unfair contract reforms now provide a much bigger regulatory stick.

Corporations breaching the UCT laws will now face maximum civil penalties of the greater of $50 million, three times the value of any benefit attributable to the breach, or 30% of adjusted turnover (previously unfair terms were simply void and unenforceable).

Importantly, these changes do not alter the current legal tests of when a term will be “unfair”, however they expand the definition of a “small business contract” so that more business-to-business/B2B contracts will be captured by the laws across most industries.

1.     The reforms: Expansion to broader class of “small business contracts”

UCT laws apply only to “standard form contracts” that are also “consumer contracts” or “small business contracts”. The reforms, while introducing civil penalties and leaving the definition of “consumer contract” untouched, expand the definition of “small business contract” in two key ways:

• Removing the requirement for contracts to be $300,000 or less in value, or $1 million or less for contracts longer than one year in duration, for UCT laws to apply (but note a $5 million upper limit is being retained for small business contracts for financial products/financial services); and
  

• Re-defining a small business as a business that satisfies both or either of the following:

o   employing 100 or less persons (which is an increase from the 20 person or less requirement under current UCT laws).

o   a turnover of less than $10 million.

This means that the UCT laws will now apply to a standard form contract where only one party is a business with a turnover of less than $10 million and/or a business that employs 100 persons or less (regardless of their turnover).

2.     A recap: “Consumer contract”, “small business contract” and “standard form contract” – key thresholds

The UCT laws only apply to unfair terms in “consumer contracts” or “small business contracts” for goods, services and interests in land which are also “standard form contracts”. The UCT laws also cover financial services and products.

• Consumer contract: Contracts for goods, services or interests in land acquired for personal, domestic or household use or consumption.

• Small business contracts: Contracts for goods, services or interests in land where one or both parties meet the “small business contract” definition outlined above.

• Standard form contracts: Several factors are considered in relation to this threshold requirement, including whether the contract is proposed on a ‘take it or leave it’ basis, the bargaining power of the parties and whether a party was provided with an effective opportunity to negotiate substantive contract terms. The UCT reforms clarify that negotiation in relation to minor terms may not be enough to take a contract outside of standard form. Importantly, the party defending an unfair contract term claim has the burden of proving that it is not a standard form contract.

Industries that may be more readily caught by UCT laws due to the use of standard form contracts include:

• Construction and engineering services utilising Principal-Head Contractor-Subcontractor hierarchy – This structure means that bargaining power is often concentrated in the Principal and/or Head Contractor, with Subcontractors or Consultants required to enter into contracts on onerous terms and take on liability in relation to matters beyond their control.

• Technology and software services provided on “take it or leave it” terms – It is common for technology or software services to be provided under standard terms that are non-negotiable, particularly in relation to cloud-based software services or software subscriptions.

• These examples of course do not limit the sectors that may be affected. Generally any goods or services contracts may be standard form if a reasonable opportunity to negotiate the substantive terms is not afforded.

Other than limited exceptions, the UCT laws apply to contracts for goods and services across all industries including technology, financial services/products, construction, engineering, design, other professional services, insurance and health.

For engineers, a notable feature is that UCT laws apply to engineering services even though the statutory guarantee of fitness for purpose under the Australian Consumer Law does not apply.

UCT laws will continue to apply to small business contracts with Commonwealth, State and local governments and councils as if those government bodies were corporations, but only to the extent that the body is carrying on a business. ‘Carrying on a business’ is a factual question requiring an element of commerce, trade or the conduct of an ongoing commercial enterprise but does not require the making of profit.

3.     When will a term be “unfair”?

The UCT reforms will not affect the current legal test of “unfair”.

A contract term will only be unfair where all three of the following are satisfied:

1.     The term would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

2.     The term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and

3.     The term would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.

The transparency of a disputed term in the context of the whole contract is another key factor. Transparency means whether the term is plainly expressed, legible, presented clearly and readily available. Ultimately it will depend upon the individual circumstances as to whether a contract term is unfair.

The Australian Consumer Law lists examples that may be unfair contract terms depending on the circumstances of each case. Most of the examples fall into the category of contract terms granting rights to one party but not another, including:

• unilateral rights of renewal;

• unilateral variation of contract terms including price;

• unilateral termination; and

• important factual determinations to be made only by one party under the contract.

These are illustrative only and the courts have said that other clauses may be unfair under the UCT laws beyond the examples listed in the Australian Consumer Law. The following kinds of clauses have been held by courts in particular factual contexts to be unfair – we often see these clauses and they may breach the UCT laws if a party is not afforded the opportunity to negotiate the term:[1] 

Type of clause

4.     What this means?

You might have seen a number of websites and businesses communicating their changes to you by email already. However these changes impact both individual consumers and small business, and larger businesses contracting with consumers and small business.

For small business receiving standard form contract terms, this means you should notice a shift in the drafting of documents towards more balanced terms but it also means that you should review any standard contracts and push back on any unfair terms.

The added teeth of civil penalties will provide small businesses with greater leverage when negotiating contracts, and may see reduced reliance by business on standard form contracts.

[1] See the Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 and the earlier case of Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 which were civil penalty cases brought against businesses by the regulator, the Australian Competition and Consumer Commission.

Ralph Timpani and Amy Carr O’Meara