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Unfair contract terms - final countdown to the penalties

Thursday November 9, 2023

Unfair contract terms - final countdown to the penalties

As the transition period comes to an end on 10 November 2023, the much-strengthened unfair contract terms (UCT) regime will come into full effect. If your business employs fewer than 100 people or has an annual turnover of less than $10 million, it is time to review your standard form contract.

Application of the UCT regime

For any standard form contracts entered into or renewed on or after 12 November 2016, if a party to the contract is either a consumer or a 'small business,' the UCT regime will apply.

If your contract is pre-prepared, and your client is rarely given an effective opportunity to negotiate its terms, it is likely that it will be considered a standard form contract.

For those contracts made or renewed on or after 9 November 2023, or if a term of the contract is varied or added on or after 9 November 2023, the expanded definition of 'small business' will apply, namely a business that:

  • employs fewer than 100 employees (previously 20), or
  • has a turnover for the last income year of less than $10 million.

What are unfair terms in a contract?

Under the Australian Consumer Law, a term is considered unfair if it:

  • causes a significant imbalance in the parties’ rights and obligations arising under the contract;
  • is not reasonably necessary to protect the legitimate interests of the advantaged party;
  • causes detriment, whether financial or otherwise, to a party if applied or relied upon.

Some common unfair terms include:

  • automatic renewal terms without notice;
  • unilateral right to increase or review prices or essential products/services provided under the contract;
  • unilateral right to suspend performance of the contract;
  • imbalanced termination rights, including significant early termination charges.

Increased penalties

Any unfair terms in the standard form contract will be considered void.

Following the new changes introduced to the regime, a breach of the UCT regulations may result in a maximum penalty of over $50 million for body corporates and $2.5 million for individuals. Additionally, the court is now empowered to issue orders it deems appropriate to remedy loss or damage caused, or to prevent or mitigate potential loss or damage resulting from UCT.

In conclusion

We understand that many industries commonly rely on standard form contracts for their day-to-day operations. However, with the new UCT regime, businesses now face higher stakes. It's time to review and ensure that key contracts comply with the new regulations.

Summary of salient changes

Term

Before

Now

Small Business

Fewer than 20 people

Fewer than 100 people or turnover less than $10 million

Contract Value Threshold

Upfront contract payment of less than $300 thousand or $1 million if contract more than 12 months

There will no longer be any value thresholds that apply

Standard Form Contract

A contract that an organisation uses for all of its business without amendment

Even if some consumers or small businesses are able to negotiate the terms of a contract that is issued to a broader group of consumers or small businesses, the contract may still be a standard form contract

Contact our Commercial Law team on 03 9550 4600 for further information on contracts and unfair contract terms.


Author:
Cynthia Lin