From November 9 2023, laws surrounding unfair contract terms (UCT) in Australia will see significant expansions; affecting a much broader range of contracts than ever before.
This upcoming change prompts businesses that may not have considered the previous UCT amendments to take urgent note.
The major changes being introduced with the UCT amendments are:
- Businesses cannot use UCT’s in bespoke and standard form contracts that involve consumers or small businesses;
- An expansion of the definition of a ‘small business’ means that more businesses will be protected against UCT’s; and
- The introduction of more substantial penalties for non-compliance.
Less than two months before the implementation of these legislative changes; we strongly encourage our business clients to review the contracts they commonly use when engaging with customers and suppliers, to ensure they comply.
Understanding Unfair Contract Terms
Instead of focusing on the specific legislative changes to the Australian Consumer Law, this article focuses on ‘what are unfair contract terms’ and what businesses need to do before the November 9 deadline.
In essence, unfair contract terms create a significant imbalance in the parties’ rights and obligations to the detriment of consumers or small businesses. Such terms often go unnoticed or unchallenged and can result in unjust consequences.
What is considered an ‘unfair term’?
The Act has not changed the test for ‘unfairness’. The ACCC states that a contract term is considered to be unfair if:
- the term causes a significant imbalance in the parties’ rights and obligations arising under the contract;
- the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- the term would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Here are some common examples of terms that are likely to be considered unfair:
- Automatic renewal terms
Where a contract automatically rolls over without notice. An example includes where a free product trial rolls into a paid subscription without notice to the consumer.
- Imbalanced termination rights
The business gives itself the unilateral right to immediately suspend a contract for any reason, which may be without notice or include the payment of excessive early termination charges or other “exit fees”.
- One-sided limitation of liability or indemnity terms
Contracts with very low or one-way liability caps, overly broad exclusions of loss types (e.g., excluding liability for willful default or negligence), wide-ranging uncapped loss categories, and one-sided indemnities for external risks or contract breaches.
- Unilateral variation terms
The right to unilaterally vary product descriptions or service levels, update terms published on a website without notice, and update company policies (e.g., an acceptable use policy), which forms part of the contract.
- Unfair payment terms
The right to unilaterally vary fees, the requirement for pre-payment, no ability to get a refund for unused services/products, and charging without the supplier performing under the contract.
What businesses do the UCT amendments impact?
The UCT changes has expanded the legislation’s coverage, allowing for more small businesses to be protected.
The new law will provide protection against UCT to businesses that employ less than 100 people, or have an annual turnover of less than $10 million.
What does the ACCC recommend?
The ACCC suggested five guidelines for contract review:
- Consider the terms of the contract from both points of view.
- Include counter-balancing terms. For example, a reciprocal ability to exit the contract without penalties.
- Avoid broad terms beyond what is reasonably necessary to protect your business’ legitimate interests.
- Meet consumer law obligations. For example, refrain from terms that limit guarantee rights.
- Be clear and transparent in the contract’s language and key terms.
What are the penalties?
The maximum penalty for UCT breaches under the new law has increased.
For companies, the penalty will increase to the greater of:
- $50 million (formerly $10 million);
- Three times the value of the benefit to the company if able to be determined; or
- 30% of the corporation’s turnover during the offence period (formerly 10% of the annual turnover only in the 12 months prior to the breach).
For individuals, the penalty is:
- $2.5 million (formerly $500,000).
NOTE: These penalties will only apply to new contracts and renewals or variations of existing contracts entered into, on or after 9 November 2023.
How to prepare for these UCT changes
We are encouraging businesses to take the time now to review all their consumer, supplier, and contractor agreements to ensure they are compliant with the new legislation.
Next Steps? How Can Morrows help?
While some changes won’t apply to contracts until they are renewed or a new contract is entered into, we encourage our clients to be proactive. We suggest you engage an experienced legal counsel to review and update your existing agreements.
Morrows Legal Solutions is well-equipped to advise on what you may need in your business contracts. Our service can help you avoid potential penalties and encourage trust and goodwill with your customers and suppliers. Reach out if you would like to discuss further.