UNFAIR CONTRACT TERMS

Eales & Mackenzie Lawyers Melbourne

By Dean Jones

Background

Almost all Australian businesses are affected by the unfair contract terms (UCT) regime. This means that their standard form consumer contracts and standard small business contracts should be reviewed by experienced contract lawyers to ensure they do not include any ‘unfair contract terms’. Unfair contract terms are illegal and carry substantial penalties.

When does the UCT Regime Apply?

The new UCT regime applies to:

  • Consumer contracts and small business contracts which are ‘standard form contracts’ entered into or renewed on or after 9 November 2023.
  • A term of an existing consumer contract or small business contract that is a ‘standard form contract’ that is varied on or after 9 November 2023. The new UCT regime only applies to the terms which are varied.

A consumer contract is a contract for the supply of goods or services, or a sale or grant of an interest in land, to an individual for wholly or predominantly personal, domestic or household use or consumption.

Under the Australian Consumer Law (ACL), a small business contract is a contract for the supply of goods and services, or sale or grant of an interest in land, where at least one party to the contract is a small business – that is a business that employs 100 or fewer people at the time the contract is signed or has a turnover for the last income year of less than $10 million, irrespective of the value of the contract.

What is a Standard Form Contract?

A standard form contract is a contract that is not subject to negotiation between the parties (e.g.: ‘take it or leave it’ terms). It does not matter whether your customer is a company or an individual. For small business contracts, the presumption is that the contract is a standard form contract unless proven otherwise. 

What is an Unfair Contract Term?

A term of a consumer contract or small business contract is considered unfair if it:

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

The ACL and the ASIC Act includes a Grey List which is a guide to be used by the courts when assessing the fairness of a term, without establishing a presumption that such terms are inherently unfair. 

Terms that are most likely to be challenged as being unfair are terms that include:

  • Excessive default fees, where those fees exceed what is required to protect the supplier from loss.
  • The obligation to pay for defective goods or services, regardless of whether they are supplied and operate as intended, where it is due to something that the supplier, but not the small business, has control over, and the small business is likely to suffer detriment as a result. 
  • Terms imposing penalties for trivial breaches of a contract. 
  • The right to the supplier to unilaterally vary the contract, in unspecified ways, even by providing notice, without giving the small business a real and reasonable opportunity to exit the contract without penalty rather than accept the variation.

Fairness in this context is not a measure of the morality or conscionability of the term, contract or transaction. When a court decides whether a term is unfair, it must consider the extent to which the term is transparent and its impact on the contract as a whole. 

Penalties for Unfair Contract Terms

The maximum penalties for unfair contract terms under the ACL are:

  • For companies, the greater of $50 million and 3 times the value of the benefit obtained. If the value of the benefit cannot be determined, 30% of the adjusted turnover during the breach turnover period (i.e., over the period the breach occurred, with a minimum of 12 months).
  • For individuals, $2.5 million.

If a court finds that a term is unfair, it can also make a range of orders, including to:

  • Declare all of part of the contract to be void.
  • Vary the contract or refuse to enforce some or all of the terms of the contract.
  • Direct the business to refund money, return property or provide relevant services to the affected consumer or client.

What To Do?

If you have existing precedent agreements, it would be possible to have two versions of those agreements: one for small business customers where the UCT regime applies, and one for when it does not. You will not always know though whether your customer is a small business or not, so in practice the recommendation is to assume that all customers are small business customers and that the UCT regime applies and to therefore have one set of agreements, prepared on that basis.

Each of your existing agreements in standard form should be reviewed on a line-by-line basis to assess whether each term could be considered ‘unfair’ or exempt at law. 

This has created a complicated picture. For advice on the application of the UCT Regime and how it applies to your contracts, please contact Dean Jones or one of our team of experienced contract lawyers on (03) 8621 1000

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