Constructing a fair contract can save you millions
From 9 November 2023, major amendments apply to the unfair contract term (UCT) regime, introduced by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (the Amending Act) (Amending Act). The UCT regime applies to standard form contracts entered with consumers and small businesses, and attracts significant penalties.
What has changed?
Businesses or individuals who use UCT in their standard form contracts may now be liable for significant penalties. Further, the definition of a ‘standard form contract’ and of a ‘small business’ has been expanded and will now encompass a far greater number of contracts, and individuals impacted by the regime.
The changes affect contracts:
entered into from 9 November 2023; or
renewed or varied from 9 November 2023.
In the construction industry, we expect to see the UCT regime apply to:
Amended Australian Standard Contracts;
All businesses using standard form contracts to supply goods and services;
Standard form contracts between contractors and subcontractors; and
Terms of trade contracts.
Standard form contract
The Amending Act provides clarity in assessing standard form contracts, requiring the court to now consider whether one of the parties to the contract has prepared another contract on the same or substantially similar terms, and if so, how many of those contracts were made.
Further, the contract may be determined to be a standard form contract despite the existence of the opportunity for a party to negotiate changes to contract terms that are insubstantial in effect, the opportunity for a party to select a term from a range of preselected options, or an opportunity to negotiate terms of another contract.
The burden on proof will be on the business issuing the contract to prove that it is not a standard form contract.
Will this impact my business?
Do you contract with any of the following:
A business with less than 100 employees; or
A business with less than $10m turnover; or
An individual consumer
If you answered yes to any of the above, you may be impacted by the UCT regime.
Who is a small business?
The reform significantly expanded business’ that will be protected under the UCT regime.
Previously, a small business was considered to be one with fewer than 20 employees. The new regime expands this threshold to include businesses with 100 employees or less or that generate an annual turnover of less than $10 million.
What is an unfair contract term?
A term will be considered unfair if:
It causes significant imbalance in the parties rights and obligations 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 to the receiving party if it was relied upon
Terms likely to be considered unfair include:
Automatic renewal terms
Unilateral variation terms
Imbalanced termination rights
Unequal termination payment terms
Penalties
It is now a civil offence for a business to use or rely on, or purport to use or rely on UCTs in their standard form contracts.
Businesses may be liable for the greater of the following penalties:
$50 million dollars;
Three times the value of the benefit received by the benefiting party from the contract; or
30% of the business’ adjusted turnover during the ‘breach turnover period’.
For individuals relying on UCTs, you may be liable for fines of up to $2.5 million for each separate breach.
Each UCT in a standard form contract is considered a separate breach and can therefore attract a separate penalty. This means multiple penalties can be applied under the same contract. If you provide a standard form contract to a number of consumers or small businesses, you may be found liable for each separate breach, under each issued contract.
In addition, to these monetary penalties, courts now have the power to determine other appropriate remedies. These include; compensation orders, injunctions, orders to void or vary the contract or powers to disqualify persons from managing companies.
The ACCC has indicated that UCT in consumer and small business contracts will form part of its 2023-24 compliance and enforcement priorities, so expect that your standard form contracts may come under scrutiny.
Key takeaways
It is critical that your contracts are reviewed immediately to determine whether your business contracts fall within the definition of a standard form contract, and if so, whether they contains any UCT.
If you would like assistance to determine whether your business contracts are affected by the most recent UCT amendments, please contact:
Paul Gray
Principal
T 03 5225 5231 | M 0414 195 886
E pgray@ha.legal
Ben Broadhead
Principal
T 03 5226 8549 | M 0413 561 332
E bbroadhead@ha.legal
Hugo Le Clerc
Associate
T 03 5225 5213
E hleclerc@ha.legal
