Changes to the unfair contract terms regime – How this will affect you.

Major amendments to the unfair contractual terms (“UCT”) regime were introduced by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (the Amending Act) (“Amending Act”) which received royal assent on 9 November 2022, and which comes into effect this year, on 9 November 2023. In particular, the Amending Act aims to address the imbalance of bargaining power between parties entering into standard form contracts where one of the parties is a consumer or a small business. In particular, the Amending Act aims to provide consumers and small businesses with more protection because they often have less resources and as such, consumers and small businesses are more likely to enter into one-sided contracts, which contain UCTs and which leave them ‘worse off’.

Although the current regime aims to address this issue, it does not impose any penalties and as such, there has been very little deterrence for businesses to comply with the current UCT regime. As such, the Amending Act has introduced penalties for non-compliance in order to increase the 'price” of non-compliance and deter businesses from using UCTs. Further, the Amending Act also introduces provisions which allow the Courts to provide consumers or small businesses with remedies (in the event a breach occurs).

In order to prepare your business for the new changes to the UCT regime, this article provides an overview of the current UCT regime, explains the amendments to the current UCT regime and gives businesses timely tips on what steps they should take to ensure that their business is compliant, prior to the amendments taking effect. ???

Current Regime

In order to understand the impact of the amendments which will be introduced by the Amending Act, we provide a short overview of the current UCT regime below. ?

The current UCT regime was created in March 2010, to protect consumers from UCT terms set out in standard form contracts. Then, in 2016, additional provisions were added to the UCT regime to provide protection to small businesses from UCTs contained in standard form contracts. It is important to note that the regime only applies to standard form contracts. We discuss the meaning of this term further below. The provisions which make up the current UCT regime are set out in two separate pieces of legislation, namely:

(a)??? the Competition and Consumer Act 2010 (Cth); and

(b)??? the Australian Securities and Investments Commission Act 2001 (Cth),

together the (“UCT Acts”).

Under the UCT Acts, a term in a standard form contract is considered a UCT if it:

• causes significant imbalance in the parties’ rights and obligations;
• the term is not reasonably necessary to protect the legitimate interests of the party providing the contract; and
• it would cause detriment to the receiving party if the term was relied on.

Whilst these provisions have been successful in that they made it unlawful to include unfair terms in standard form contracts and allowed the courts to declare any UCTs void, the court was still required to uphold the validity of the contract as a whole, with the exception of any terms which were deemed to be UCTs. Further, the provisions under the current regime do not provide much of a deterrence in that the inclusion of, or reliance upon UCTs, does not attract any penalties for the business using the UCT. As a result, there was pressure to amend the current regime in order to introduce a higher cost, and risk, for businesses which decided to include UCTs in their standard form contracts.

New UCT Regime

The new UCT regime comes into effect on 9 November 2023, and will apply to the following standard form contracts entered into by consumers or small businesses:

1. Contracts which are entered into on, or after, 9 November 2023;
2. Contracts which are renewed on, or after, 9 November 2023; and
3. Contracts which amend or add any term to an existing contract on or after 9 November 2023.

As mentioned above, the purpose of the new UCT regime is to provide additional protection to more small businesses and to further deter parties from including UCTs in their standard form contracts, by increasing the ‘cost’ of doing so.

In particular, the new Amending Act has introduced the following provisions to attempt to fulfill the above-mentioned purposes: ??

1. Deems any business with less than 100 employees or a turnover of less than $10million a year, as a small business;
2. Clarifies the types of contracts which will be considered ‘standard form contracts’ under the new UCT regime;
3. Makes it an offence for a business, or an individual, to include and/or rely on, or purport to include or rely on, a UCT (each unfair term contained in a contract is considered a separate convention);
4. Introduces penalties for businesses, or individuals, who include or rely on, or purport to include or rely on, any UCT; and
5. Provides courts with power to provide remedies to the affected party. ?

Comparison between the current and new UCT regimes

Standard Form Contracts

One of the most problematic aspects of the current UCT regime, is that there is minimal guidance regarding what a standard form contract entails. The courts have provided some guidance by considering the following factors when trying to determine whether a contract will be considered a standard form contract:

1. Whether the party receiving a contract was able to select between pre-determined range of terms;
2. Whether there had been previous examples of the receiving party negotiating minor or unsubstantial changes to the terms of the contract; and
3. Whether the party to another similar contract has been given an effective opportunity to negotiate the terms of the contract.

Notwithstanding the guidance from the courts, there was still confusion and uncertainty around which contracts would be considered standard form contracts.

As such, when the new UCT regime was introduced, one of the major amendments made was the clarification of whether a contract would be considered a ‘standard form contract’. The Amending Act provides that a contract may be considered a standard form contract where “one of the parties has made another contract, in the same of substantially similar terms, prepared by that party, and if so, how many such contracts that party has made”. Further, the Amending Act also provides that a “contract may be determined to be a standard form contract despite the existence of one of more of the following terms”:

(a)??? an opportunity for a party to negotiate changes, to terms of the contract, which are minor or insubstantial in effect;

(b)?? an opportunity for a party to select a term from a range of options determined by another party; or

(c)??? an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

As such, under the new UCT regime, a contract may still be considered a standard form contract even if one or more of the above-mentioned terms have been met. There is now a more qualitative approach to this issue, rather than a formalistic approach, and whether a term will be considered unfair will depend on the circumstances.

Further, we remind businesses that a contract will be presumed to be a standard form contract, until the party relying on the term proves otherwise. As such, the burden of proof is on the business issuing the contract to prove that it is not a standard form contract.

Small Business Definition

Under the current UCT regime, the definition of a ‘small business’ only encompasses businesses with less than 20 employees. However, under the new UCT regime, the scope of small businesses has been increased to capture more businesses, and as such, more standard form contracts. In particular, the definition of a small business under the new UCT regime will cover businesses which:

(a)??? Employ 100 people or less; or

(b)??? Generate less than $10 million turnover in the previous income year.

As such, the number of businesses which will be protected by the new UCT regime will be considerably greater than under the current regime.

Introduction of Penalties

A critical change introduced by the Amending Act is the imposition of penalties for businesses, or individuals, which use or rely on, or purports to use or rely on, UCTs in their standard form contracts. If found to be in breach, businesses may be liable for penalties the greater of:

(a)??? $50 million dollars under the ACL;

(b)??? Three times the value of the benefit received by the benefiting party from the contract (if the value of the benefit can be determined by the Court); or

(c)???? 30% of the business’ adjusted turnover during the ‘breach turnover period’. ?

Each separate UCT found within a standard form contract can attract the above-mentioned penalties. As such, if a business includes more than one UCT in a standard form contract, or if the business provides the standard for contract to multiple consumers or small businesses, it may be liable for penalties for each of those breaches. ??

Similarly, individuals who create or rely on, or purport to create or rely on, a UCT within a standard form contract, may be held liable for a separate contravention of the Amending Act as a result of their individual involvement. As such, they may be liable for fines up to $2.5 million, for each contravention of the Amending Act.

Court Powers

In addition to the ability to impose penalties for breaches, Courts will also have the power to make orders to remedy breaches of the Amending Act. In particular, Courts and tribunals will have the discretion to determine appropriate remedies under the new UCT regime including, but not limited to:

(a)??? Compensation orders to the affected party;

(b)??? Granting injunctions;

(c)???? Varying contracts;

(d)??? Naming and shaming offenders; and

(e)??? Disqualifying persons from being involved in managing a company.

What do businesses need to do leading up to Nov 2023?

As a result of the amendments introduced by the Amending Act, the number of consumers and small businesses which will be protected by the UCT regime will increase. As such, I strongly recommend that businesses seek professional assistance to ensure their contracts are reviewed properly, to determine:

1.?????? Whether the contract could be considered a standard form contract;

2.?????? Whether the contract involves consumers or small businesses; and

3.?????? Whether the contract contains any unfair contract terms.

Lastly, I also recommend that businesses take steps to ensure they have robust processes and procedures in place which provide the opportunity for, and encourage, the parties to discuss and negotiate the proposed terms of the contract prior to the parties entering into the contract. Having these processes in place will reduce the risk that the contract will be considered a standard form contract.

Further, I am also of the view that training should be provided to staff members which are involved in drafting or issuing contracts, so that they are privy to these amendments and the consequences of getting it wrong.

If you wish to discuss any aspect of this client alert, require specialist advice in relation to determining whether your business will be affected by the new UCT regime, or assistance reviewing your business’ contractual terms or consultation processes, please do not hesitate to contact me.

This article is not intended to constitute, and should not be treated as, legal advice.

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