New UCT Regime: Harsher Penalties for Unfair Contract Terms

DATE PUBLISHED: November 9, 2023

key takeaways

It is a contravention of the Australian Consumer Law (ACL) to include, apply or rely on an unfair contract term (UCT) in a standard form consumer business contract - as of 9 November 2023, what constitutes a UCT has been broadened, and the penalties for any such contravention have been increased.
The maximum penalty will be the greater $50 million, 3x the value of the benefit obtained due to the breach, and 30% of adjusted gross turnover during the period of the breach – per contravention!
Australian businesses should immediately review the standard documents they use to contract with customers and suppliers to ensure they comply with the updated UCT regime.

The New UTC Regime

On 9 November 2022, the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 received Royal Assent and introduced changes to the Competition and Consumer Act 2010 (Cth), introducing broader applications and harsher penalties for contravention of the UCT regime.

This expansion to the UCT regime will apply to standard form consumer contracts and small business contracts: (i) entered into from 9 November 2023; or (ii) renewed or varied from 9 November 2023.

The new UCT regime will apply to a broader range of contracts than ever before. Businesses whose ‘standard form contracts’ might have previously been outside of the reach of the ACL and its UCT regime now need to take more care as they may now be exposed to severe penalties for non-compliance.

Within the next few months, Australian businesses should review the standard documents they use to contract with customers and suppliers to ensure they comply with the updated UCT regime.

Our previous articles about this new regime can be found here and here.

Key Changes

The key changes to the ACL include:

Increased penalties:

For companies - the greater of:

Header	Now - Maximum Penalty (per contravention)	Previous - Maximum Penalty (per contravention)
Corporations	Greater of: AUD 50 million; or 3 times the value of the benefit (if the Court can determine the value of the benefit); or 30% of the adjusted turnover during the breach turnover period (if the Court cannot determine the value of the benefit).	Greater of: AUD 10 million; or 3 times the value of the benefit (if the Court can determine the value of the benefit); or 10% of the annual turnover of the body corporate (if the Court cannot determine the value of the benefit).
Individuals	AUD 2.5 million	AUD 500,000

Previously, UCTs did not attract penalties and were merely deemed void and unenforceable under the ACL if a Court were to find that term to be ‘unfair’. Now, a person is prohibited from making a contract that contains a UCT, and from applying or relying on (or purporting to apply or rely on) that term.

Notably, each UCT contained in a contract is a separate contravention, meaning that if, for example, a person makes a contract that contains two terms that are found to be UCTs, and has entered into, varied or renewed 50 contracts that contains those UCTs that person has committed 100 contraventions of the UTC regime and is liable for 100 times the penalty stated above.

Changes to assessment of ‘standard form contracts’:

The ACL does not define what a 'standard form contract' is. However, if a party alleges that a document is a 'standard form contract', it is presumed to be one unless another party proves otherwise.

When determining whether a document is a 'standard form contract', relevant matters include whether one party to the contract prepared the document and whether that party has entered multiple other documents on the same or substantially similar terms.

Importantly, the new regime provides that a lease may be determined to be a 'standard form contract' even if there was an opportunity for the other party to negotiate minor or insubstantial changes to the contract or to select a term from a range of options provided.

Pursuant to the new UCT regime, when determining whether a given contract is a ‘standard form contract’, a Court must not consider:

whether a party had the opportunity to negotiate minor changes;
whether a party had the opportunity to select from a range of options; or
whether a party to another contract was given the opportunity to negotiate its terms.

Broader definition of small business:

The UCT regime applies to ‘standard form contracts’ with ‘consumers’ and ‘small businesses’. The definition of ‘small business’ will be expanded from a business that employs fewer than 20 people to one that has fewer than 100 employees or less than $10 million in annual turnover in the previous income year – significantly increasing the scope of businesses that will be protected by the UCT regime. Australian businesses that engage suppliers using ‘standard form contracts’ need to be aware that any suppliers with fewer than 100 employees will now be protected as ‘small businesses’ under the UCT regime.

When is a Term 'Unfair'

Section 250 of the ACL entitles both a party to a contract and a “regulator” (either the ACCC or one of the state and territory consumer affairs authorities) to apply to the Federal Court for a declaration that a term of either a consumer contract or a small business contract is unfair.

A contract term will be held to be unfair where all three of the following tests are satisfied:

First Test – Significant Imbalance

The party claiming that a certain contract term is unfair must establish the existence of a significant imbalance on the balance of probabilities. This involves a factual determination as to whether the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract.

Second Test - Not required to protect legitimate interests

The second test is whether a term is reasonably necessary to protect the legitimate interests of the party advantaged by the term.

There is a rebuttable presumption that that a term of a contract is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, and it is for the party that is presumed to be advantaged to prove otherwise.

Third Test - Detriment

The final test of unfairness requires a finding that the term complained of would cause detriment to a party if it were to be applied or relied on. The detriment need not be financial, or exclusively financial, in nature.

Examples
The case of Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd provided a number of examples of unfair contract terms. In that case, the court found that 8 of 18 contract terms were unfair. Some of the terms held to be void included:

(automatic renewal) - the contract automatically renewed within 30 days before the end of the term;
(amended prices) - the company could unilaterally amend their prices on 30 days' notice;
(exclusivity) - the company had an exclusive right to provide waste services to the customer;
(suspending services) - the company accepted no liability for not providing the services at the agreed times; and
(termination) - the customer could not terminate the agreement if it owed any amount to the company.

Section 25 of the ACL sets out a non-exhaustive “grey list” of examples of the kinds of terms of a consumer contract or small business contract that may be unfair, such as:

terms permitting unilateral termination or variation of a contract;
terms that penalise parties for breach;
terms that permit a detrimental assignment of the contract without consent
conclusive evidence clauses; and
terms that limit one party's right to sue.

Exemptions From The UCT Regime

Despite the above, a contract term cannot be declared unfair if the term:

defines the main subject matter of the contract;
sets the upfront price payable under the contract; and
is a term required or expressly permitted, by a Commonwealth, state or territory law.

Additionally, from 9 November 2023, more types of terms will be excluded from the operation of the UCT regime, being:

any term taken to be included in a standard form contract by the operation of a Commonwealth, state or territory law (to the extent that law requires the term to be included); and
any term that results in other contract terms being included because of the operation of another law of the Commonwealth or a state or territory (to the extent the UCT regime would prevent the other terms from being included as required by that law).

UCT regime set out in the ACL does not extend to provisions in the constitution of a company, managed investment scheme or other kind of body, however, these are covered by the Australian Securities and Investments Commission Act 2001 (which has been amended with near-mirror UCT concepts).

What Should I Do Next?

Businesses entering into new contracts or renewing existing ‘standard form contracts’ for consumers and small businesses should consider reviewing their standard terms and conditions to ensure they avoid the significant pecuniary penalties that will come into effect from 9 November 2023.

When preparing, negotiating, and entering into all contracts, businesses must:

consider the reason the counterparty (if an individual or small business) has for acquiring the goods or services;
consider if a term imposes a powerful consequence on one of the parties (such a unilateral right to terminate), whether the interest it protects is legitimate and is proportionate to that consequence;
consider whether the terms are transparent (expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term); and
consult with legal advisors when negotiating and drafting terms, renewing contracts, and when any issues arise.

conclusion

McInnes Wilson Lawyers can assist by:

offering to review contracts to provide an industry-specific report as to UCT regime risks for their existing or proposed contracts;
providing the advantage of our UCT focussed suite of contract templates and advice templates to allow businesses to have confidence in their contracting;
confirming whether a contract is subject to the UCT regime under the ACL;
reviewing the terms of a contract and determining whether any of its terms are unfair or likely to be unfair if raised by a counterpart to a transaction; and
amending or redrafting the terms of contracts to minimise exposure to the UCT regime and its significant penalties.

For more information about how McInnes Wilson Lawyers can assist with the above, please contact either Chris Davis on (07) 3014 6530 or cdavis@mcw.com.au, or George Londy on (07) 3292 5720 or glondy@mcw.com.au.