Significant changes to unfair contract terms laws to affect more business-to-business contracts: six-month countdown to penalties

By Suzie Leask 

Businesses using standard form contracts have less than six months to get their house in order before the 9 November 2023 commencement date for the expanded unfair contract terms (UCT) regime and application of significantly increased penalties for non-compliance. In this article, we provide businesses with a reminder of the changes and discuss what you should be doing now to ensure your standard form contracts are compliant before penalties come into force later this year.

What do the changes do?

The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) was passed in November of last year, drastically changing the UCT regime under the Australian Consumer Law (ACL) in the Competition and Consumer Act 2010 (Cth) (Act). Since its introduction in 2016, the UCT regime has provided consumers and ‘small businesses’ protection against unfair terms in standard form contracts below a certain monetary threshold (currently $300,000 or if the contract term is more than 12 months, less than $1,000,000).

As set out below, the changes will completely remove the monetary threshold and significantly expand the scope of the definition of ‘small business’, capturing a significant proportion of business-to-business contracts. Once the current transition period ends, the expanded regime will apply to standard form contracts entered into, renewed or varied from 9 November 2023.

Broader application to cover more contracts

From November this year, the UCT regime will apply to standard form business contracts where at least one party satisfies either of the following:

• it has fewer than 100 employees (currently fewer than 20 employees); or
• less than $10,000,000 in annual turnover during the previous financial year.

This expands the scope of the UCT regime to include an even broader range of business contracts and will affect business-to-business contracts throughout the supply chain. Counterintuitively, it even captures those standard form contracts where the supplier is a small business that prepared and is seeking to rely on the terms of the contract against an entity that falls outside of the above thresholds.

Introduction of significant penalties and expanded court power

In addition to expanding the scope of the regime, the changes also shift the risk profile of including potentially unfair terms in standard form contracts. The outcome of a standard form contract being held to include unfair terms has, until now, been that those terms will be considered void and unenforceable. From 9 November, not only will the terms be void, but businesses can also receive penalties for contravention of the UCT provisions, with each UCT contained in a contract a separate contravention (making the combined pecuniary penalty potentially very large). Notably, it will be prohibited to:

• make a contract with a UCT (if the UCT was proposed by that person); or
• apply or rely on (or purport to apply or rely on) a UCT.

In alignment with the recently updated maximum penalties in the Act, the new penalties can be up to $2,500,000 for individuals, and for corporations the greater of:

• $50,000,000;
• three times the benefit obtained and reasonably attributable to the breach, if that can be determined; or
• if the value of the benefit cannot be determined, 30% of the corporation’s adjusted turnover during the breach turnover period.

Note the ASIC Act^[1] contains equivalent provisions relating to financial products or the sale of financial services. Those provisions do retain a (increased) contract value threshold such that the UCT regime will only apply to contracts for financial services valued at less than $5,000,000.

Courts will have expanded powers to void, vary or refuse to enforce any part or all of a contract containing UCTs. Additionally, courts will be empowered to prevent a person from entering into future contracts which contain a declared UCT, or relying on a declared UCT in any existing contract (whether or not that contract is before the court). This change has the potential for judgments to affect a wide range of a company’s contracts generally and even other contracts and parties not involved in the court proceedings.

What is a standard form contract?

The UCT regime only applies to ‘standard form contracts’. However, the relevant provisions in the ACL currently provide limited legislative guidance as to what ‘standard form’ contracts are – rather, they set out the matters that the court may consider when determining that question.

The changes commencing in November provide further clarification of those matters that must be considered by the court. However, they also go further, by ensuring that a contract may still be ‘standard form’ even where a party has the opportunity to:

• negotiate changes to contract terms that are minor or insubstantial in effect;
• select a term from a range of options determined by another party; or
• negotiate terms of another contract or proposed contract.

The recent case of AIBI Holdings Pty Ltd v Virtual Technology Services Pty Ltd^[2] – decided under the current regime – gave some comfort to organisations that the presumption that a contract was in standard form could be successfully rebutted based on, among other things, the fact the parties did negotiate aspects of the contract. The changes commencing in November may make those rebuttals more difficult.

What is unfair?

Under the ACL, a term of a consumer contract or small business contract is unfair if:

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.^[3]

The case law since the introduction of the UCT regime has provided guidance to businesses and their advisors on what terms the court may consider to be ‘unfair’ – the recent, well-publicised Fujifilm^[4] case being the high-water mark on the range of terms that the court has accepted are unfair. However, given the generality of the above definition, deciding whether a contract term is unfair is highly situation-specific and will depend on a range of factors, including the relative bargaining power of the parties to the particular contract in question, protection of legitimate business interests and the terms of the contract as a whole.

What to do before November

All businesses, whether large or small, should be reviewing their contracts and assessing whether their standard form contracts comply with the relevant changes to the UCT regime before the November deadline. Contraventions of the UCT regime need not be egregious or persistent to attract penalties under the expanded regime, so even minor contraventions present a potential financial and reputational risk for businesses.

Equally as important as considering the terms of a contract, is to consider how template documents are presented to suppliers, customers and clients during an organisation’s sales and contracting processes. Blanket refusals to deviate from ‘approved terms’ now come with a higher risk profile, by increasing the risk that a contract will be considered ‘standard form’ and therefore attract the application of the bolstered and expanded UCT regime. Much like other areas of competition law (such as the cartel and misleading and deceptive conduct prohibitions) businesses should be preparing to include the UCT regime as a key part of staff and executive training and risk management decisions.

Hall & Wilcox has significant experience working with businesses to minimise regulatory risk under the Australian Consumer Law and the ASIC Act in relation to standard terms of trade and business contracts, as well as assisting businesses with tailored training and policy documentation addressing these matters. Please contact Mark Lebbon, Suzie Leask, Kurt Wicklund, James Deady or our team if you require assistance with unfair contract compliance reviews.

[1] Australian Securities and Investments Commission Act 2001 (Cth) 
[2] [2022] FCA 696
[3] Competition and Consumer Act 2010 (Cth) Schedule 2, section 24
[4] ACCC v Fujifilm [2022] FCA 928