Less than one month to go: what will happen if you haven’t updated your unfair contract terms

This is the third article of McCullough Robertson’s series on What you don’t know about unfair contract terms, which highlight upcoming changes to Australia’s unfair contract terms (UCT) regime. In our first two articles we took a closer look at the non-disparagement clause and indemnity clauses. With less than one month to go, we thought it would be timely to give a recap on who is now caught by the regime and the penalties of non-compliance. 

The following discussion predominantly focuses on the UCT regime under the Australian Consumer Law (ACL). However, these considerations similarly apply to the parallel UCT regime for financial services under the Australian Securities and Investments Commission Act 2001 (Cth).

More contracts caught than ever before

The UCT regime will now apply to more businesses and a broader range of contracts than ever before.

The regime will apply to agreements with businesses who have less than 100 full-time equivalent employees (up from 20 employees) or whose annual turnover is less than $10 million – that is, significantly more agreements may now be caught by the regime.

The contract value threshold will also be removed (or increased in the case of financial services). Currently, the UCT regime applies to small business contracts with a value of less than $300,000 (or, if the contract term is more than 12 months, less than $1 million).  From 10 November 2023, all such thresholds will be removed in favour of the functional business size tests listed above, except where a small business acquires financial services or a financial product, in which case the regime will only apply to contracts valued at less than $5 million.

Its also worth mentioning that in determining what is a “standard form contract”, courts will be obliged to consider whether one party has made other contracts in the same or a substantially similar form, and how many, with its other suppliers or customers. This will capture a much broader ambit of contracts.

New (and significant) penalties

Whereas currently a term found by a court to be unfair is rendered void, the reforms introduce a complete prohibition on proposing, applying, relying, or purporting to apply or rely on, unfair contract terms. The new penalties under the UCT regime are no laughing matter. From 10 November 2023, businesses that are found to contravene the prohibition may receive substantial fines of up to the greater of:

• $50 million;
• three times the value of the benefit received; and
• 30% of adjusted turnover (including turnover of related-bodies corporate) during the period in which the breach occurred (minimum 12 months).

Of particular interest here is that even proposing an unfair contract term is prohibited (and subject to these significant penalties). And so, businesses may fall foul of the prohibition even if no contract is ultimately entered into.

Further, 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).

ACCC enforcement priority

We expect the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission to be actively enforcing the new regime, with protecting against UCTs being an enforcement priority for both regulators this year.

In September, the ACCC released an alert urging businesses to remove unfair contract terms ahead of the changes (see here). Of particular note, is the quote from ACCC Deputy Chair, Mick Keogh, who stated “There was previously little motivation for businesses to comply with the law, despite the ACCC’s compliance and enforcement actions. We strongly urge businesses to review their contracts now to ensure they comply.” Whereas previously UCTs may have only been rendered void; from November, the significant penalties mean that including, or proposing to include, UCTs can no longer be seen as the cost of doing business (to the extent that this may have been a view previously held by contracting parties).

What should I do now?

The reforms will apply to any standard form contracts made or renewed on or after 10 November 2023, and any term of a contract that is varied or added on or after 10 November 2023. With less than a month before the reforms come into effect, it’s high time for businesses to understand the extent to which they are impacted by the changes, and to prepare accordingly.  

 In particular, it is important to: 

• identify template contracts used by your business and assess if they may be a standard form contract (and whether counterparties are given a meaningful opportunity to negotiate them);  
• assess the nature of counterparties to those standard form contracts, to determine whether you enter into contracts with consumers, or with parties with less than 100 employees or whose annual turnover is less than $10  million; 
• identify any one-sided, unfair or excessively favourable terms in those standard form agreements; and
• identify and document your company’s legitimate business interests, which can be used to justify the inclusion of contractual terms that would otherwise be considered risky from a UCT perspective. 

If you would like to discuss the practical implications of the changes, or need assistance in conducting a UCT review of your standard form contracts, please get in touch with a member of our Digital and Intellectual Property team.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.