Understanding Your Contracts: Part 1 – Unfair Terms in Standard Form Contracts

All’s fair in standard contracts… or is it? This week will see changes to the application of the “unfair contract terms” (UCT) regime contained in the Australian Consumer Law (ACL), and the introduction of these changes serves as a useful reminder to revisit your contracts and really consider the impact and effect of every term used.

Over the next three weeks, this article series will discuss terms and wording which may (unknowingly) exist in your contract which may be unfair under the UCT regime (Part 1), which may be included as standard provisions but have unintended consequences (Part 2), and which may implement standards to a higher (or lower) level than intended (Part 3).

UCT Regime

The UCT regime in the ACL is to protect consumers and small businesses who may have limited bargaining power, expertise, or ability to negotiate or assess standard form contracts. From 9 November 2023, changes will come into effect which broaden, and provide further guidance on, the UCT regime’s application, and which introduce penalties against persons who propose, or seek to apply / rely on an “unfair term”.

In the construction industry, the changes to the UCT terms regime will most relevantly apply to all businesses using standard form contracts in dealings with consumers and “small businesses” to supply goods and services.

While the legal test for whether a term is unfair will remain unchanged, there is a greater risk of facing substantial penalties for those who use standard form contracts that include unfair terms. As such, we encourage businesses to take the time to review, consider, and fully understand the terms in your contracts (and what the impact of those terms may be) to ensure you are not caught out by the UCT regime. If you would like assistance with this, please contact us.

Standard Form Contract

A contract will be subjected to the UCT regime if it is a “standard form contract” which has been entered into with a consumer or small business.

The first question, then, is “what is a standard form contract”?

The starting point (in the court’s view) is that a contract is a “standard form” unless it is proved otherwise. However, practically, a “standard form contract” will likely be a contract which a business uses with multiple different parties, across multiple different projects and transactions, without negotiation or amendment; or a contract which is used on a “take it or leave it” basis.

In determining whether a contract is “standard form” for the purposes of the UCT regime, the Court may consider any relevant matters, but must take into account the following:

1. Whether one of the parties has all, or most, of the bargaining power relating to the transaction;
2. Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
3. Whether another party was, in effect, required to accept or reject the terms of the contract in the form which they were presented (i.e., “take it or leave it”);
4. Whether another party was given an effective opportunity to negotiate the terms of the contract; and
5. Whether the terms of the contract take into account the specific characteristics of another party or of the particular transaction.

As part of the new changes to the UCT regime commencing on 9 November 2023:

1. The Court must also take into account whether one of the parties has made another contract, in the same or substantially similar terms, and if so, how many contracts that party has made; and
2. Despite the existence of any of the following factors, a contract may still be “standard form”:a. Whether a party was given an opportunity to negotiate changes to the contract which are minor or insubstantial in effect;b. Whether a party was given an opportunity to select a term from a range of options determined by the other party; andc. Whether, for example, where one contract was issued to a group of consumers / small businesses, and some of these were able to negotiate the terms.

Small Business

In addition to being “standard form”, the contract must also be made with a consumer, or a “small business”.

The biggest change (from a practical perspective) is the definition of “small business”. Under the new regime:

1. A “small business” will include any business which (at the time of entering into the contract), has fewer than 100 employees (which has increased from 20), and/or has an annual turnover of less than $10M (as worked out under the ACL); and
2. There will be no monetary caps on the value of a contract with a small business (which was previously capped at $300K, or $1M if the duration of the contract was more than 12 months).

Unfair Terms

Whilst there are no changes to what constitutes an “unfair term”, understanding its existence (and what constitutes an “unfair term”) is more crucial than ever, due to the broader application the new regime will have over transactions which may have previously been excluded.

Subject to various exceptions (outlined in the ACL), an “unfair term” is a term which, if included in a relevant standard form contract with a consumer or a small business:

1. Would constitute a significant imbalance in the parties’ rights and obligations arising under the Contract;
2. Would not be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
3. Would cause detriment to a party if it were to be relied upon.

For example, a term may be unfair if it allows one party (but not the other) to avoid or limit performance of the contract, terminate the contract, elect to renew (or not renew) the contract, vary a term of the contract, or to unilaterally determine whether the contract has been breached; or where it limits one party’s rights to sue another party.

In determining whether a term is “unfair” for the purposes of the UCT regime, the Court may consider any relevant matters, but must take into account the contract as a whole, and also the extent to which the relevant term is “transparent” (i.e., expressed in reasonably plain language, is legible and presented clearly, and is readily available to any party affected by the term).

Consequences of an “Unfair Term”

In addition to an “unfair term” being void, as part of the new changes to the UCT regime, a party who proposes an “unfair term”, or a party who seeks to apply or rely on an “unfair term”, will also be in contravention of the ACL and subject to a monetary penalty (where each term constitutes a separate contravention).

Further, the new changes allow the Court to make orders:

1. Against the party who is advantaged by the unfair term, to compensate any loss of damage that has been caused by the term ?(or prevent / reduce loss or damage) – this may include declaring that the whole (or any part) of the contract is void; ordering the contract be varied; or refusing to enforce any or all of the provisions of the contract; and/or
2. To prevent a term that is the same (or substantially similar) from being introduced in any future (applicable) contract; or to compensate any loss or damage that has been caused (or prevent / reduce loss) that is likely to be caused to any person by a similar term that is included in any existing contract.?

Application of Changes

The new UCT regime will apply to a “standard form contract” with a consumer or small business:

1. Entered into on or after 9 November 2023;
2. A contract made prior to 9 November 2023, if the existing contract is renewed after 9 November 2023 – in this instance, the changes apply to the contract as renewed, in relation to conduct which occurs after renewal (i.e., if a person applies or relies on an unfair contract term after renewal);?
3. A contract made prior to 9 November 2023, if the existing contract is varied after 9 November 2023 – in this instance, the changes apply to the term as varied / added, in relation to conduct which occurs after the term was varied / added; and the changes relevant to deciding whether a contract is a “standard form contract” will apply to the whole contract; and
4. Further, a person who proposes an unfair contract term in a contract made or renewed, or which is varied / added into a contract after 9 November 2023, may still be in contravention of the ACL, regardless if the term was proposed before or after 9 November 2023.

Lamont Project & Construction Lawyers

Our Team have the industry knowledge and experience to assist both Principals and Contractors in all major projects and payment disputes. If you would like to discuss any matters raised in the above article or the forthcoming series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.

The contents of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.

Contact:?Peter Lamont?or Lili Hoelscher

Email:?[email protected] or [email protected]

Phone:?(07) 3248 8500

Address:?Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064

Postal Address:?PO Box 1133, Milton Qld 4064