The 12-month transition period to update your standard form contracts is nearing an end. Businesses are required to update their contracts to ensure they are compliant with the new law to avoid facing penalties of up to $50 million, 3 times the gained benefit from the breach of the law or 30% of the business’s adjusted turnover. It covers not only contracts for the supply of goods and services, but also contracts for the sale or grant of an interest in land.
From 9 November 2023, reforms to the Australian Consumer Law’s unfair contract terms Regime (UCT Regime) will come into effect, meaning that it will be illegal to propose, apply or rely on an unfair term in a standard form consumer or small business contract that is entered into, renewed or varied from this date.
Key changes imposed from 9 November 2023 include:
- Penalties for proposing, using or relying on unfair contract terms, which may be severe.
- The scope of contracts caught by the UCT Regime is broadened with changes to what qualifies as a “small business”, being widened from businesses with fewer than 20 employees to now, businesses with fewer than 100 employees and/or which has an annual turnover of less than $10 million.
- The scope of contracts subject to the UCT Regime is broadened with the definition of what constitutes a “standard form contract” being expanded such that a contract may still be deemed “standard form” despite consumers or small businesses having the opportunity to negotiate the terms of the contract that is issued to them.
What constitutes an “unfair” term in a contract is wide ranging. In determining whether a term is unfair, the Court will consider the following:
- The rights and responsibilities of each party;
- The transparency of the term and whether it is expressed in straightforward language and not concealed; and
- Whether any other terms in the contract offset the potential unfairness of that term.
Example of unfair contract terms
On 9 December 2023, a concrete supplier “Concrete Co” renews 1 of its standard supply contracts with”Construction Co”, a small construction business with 20 employees. The contract which was drafted on 9 December 2022 states that:
- Concrete Co is permitted to terminate the contract without Construction Co’s consent;
- The contract automatically renews after the expiry of the initial term;
- Concrete Co is permitted to vary the supply rates and hours of delivery without Construction Co’s consent; and
- Construction Co is penalised for breaching the contract whilst Concrete Co is not.
Nothing in the contract offsets the unfair advantages afforded to Concrete Co from the above terms in the contract. Each of the above terms will likely be deemed unfair.
As a consequence, Concrete Co may be exposed to a fine that is the higher of $50 million, 3 times the gained benefit or 30% of the Concrete Co’s adjusted turnover for the period since 9 November 2023 when the unfair terms were in place. Concrete Co may also be liable to compensate Construction Co for the loss that Construction Co has suffered as a result of the unfair term, including the money lost due to the varied supply rates and/or the change to hours of delivery.
Important notes for businesses
- The UCT Regime changes, coupled with the new penalties, will significantly reshape the risk landscape for businesses regarding the use or dependency on potentially unfair terms in standard form contracts.
- Australian businesses using standard form contracts should recognise that parties they deal with who have fewer than 100 employees now qualify as “small businesses” and get the benefit of the UCT Regime (which was previously limited to businesses with fewer than 20 employees).
- Businesses that had previously classified contracts as outside the “standard form contract” parameters and hence were not subject to the UCT Regime now need to consider the new criteria and determine whether the UCT Regime now applies to them.
To avoid the consequences of not complying, contact us to discuss today.