Get ready for big changes to the Unfair Contract Terms Regime
It’s time to get ready for some major changes to contract law in Australia. From 9 November 2023, the unfair contract term regime is expanding to cover small businesses with annual turnover of less than $10 million or with fewer than 100 employees.
Given some relatively sizeable business have less than 100 employees the scope increase is significant.
For Australian startups you need to be mindful of this regime in both the B2C and B2B world now. You may need to consider having a separate set of terms (or subset of clauses) to cover business customers that are protected under the regime.
The challenge for lawyers and their clients is to work out what will be considered ‘unfair’ in this new world. Most guidance from the courts relates to consumer contracts, with a clear power imbalance. That guidance may not be helpful for business vs business disputes over unfair terms.
Read on below to see the key changes that are coming.
Who is affected?
First and foremost, it is relevant to consider who these changes will even apply to as the amendments significantly broaden the scope of contracts falling within the UCT regime.
Small business
The term ‘small business’ will now encompass businesses that employ fewer than 100 persons or have an annual turnover of less than $10 million.
Standard form contracts
The regime is concerned with standard form contracts. Standard form contracts, or ‘boilerplate’ contracts, are typically pre-made agreements used for common transactions. Standard form contracts see the parties having unequal bargaining power; the contracts are presented on a take it or leave basis, there is limited opportunity to negotiate terms and the terms are often not specific to the parties’ circumstances. These types of contracts are both efficient and consistent but can favour the drafter, and thus, regulatory changes such as these are necessary.
What constitutes an ‘unfair term’?
A term is unfair if it:
a. Would cause a significant imbalance in the parties’ right and obligations arising under the contract; and
b. It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
c. It would cause detriment (financial or otherwise) to a party if it were to be applies and relied upon.
This process is determined on a case-by-case basis, but some guidance is provided by Federal court decision in ACCC v Fujifilm Business Innovation Australia Pty Ltd & Anor. Provisions likely to be found ‘unfair’ include:
· Automatic renewal terms
· Disproportionate termination terms
· Liability limitation terms
· (potentially) Indemnity terms — watch this space as it will have massive ramifications
· Termination payment terms
· Unilateral variation terms
· Incorporation by reference
How to ensure compliance
Unfair contract terms will be assessed on a case-by-case basis, but the ACCC has provided some tips for businesses to use when reflecting on existing terms and drafting new ones. These include:
1. Considering both your point of view when considering what is necessary to protect your business’ legitimate interest as well as the point of view of the contracting party.
2. Include counter-balancing terms and recognise that should you wish, for example, for the ability to change your product or service without consulting the other party, then perhaps the other party should be able exit that contract without facing a penalty.
3. Try and be specific with what you are trying to achieve and avoid overly broad terms. Aim to draft terms that reasonably protect your business’s legitimate interests without taking too many unnecessary liberties.
4. Understand your obligations under the Australian Consumer Law. Aim not to include terms that limit your customer’s consumer guarantees rights, or terms that seek to disclaim any representations your business may have made outside of the contract
5. Be clear and be transparent. Ensure key terms are clearly drawn to the attention of your customers during the sign-up process, and any renewal process.
Penalties
Significant financial penalties will be imposed on individuals or businesses proposing or relying on unfair contract terms. The court will have the authority to void, vary, or refuse to enforce such contracts. The maximum financial penalties for business under the amendments are, the greater of:
· $50,000,000;
· If the court can determine the value of the benefit, three times the value of the benefit; or
· If the court cannot determine the benefit, 30% of adjusted turnover during the breach period.
The goal of these changes is relatively simple and is outlined my Mr Keogh as ‘better [protecting] consumers and small businesses who have limited bargaining power, expertise, and ability to negotiate or assess standard form contracts.’ Thus, it’s in business best interests to ensure they are operating with contractual terms that meet the regulatory guidelines. Finally, it is relevant to note that considering the significant notice given of the amendments, it is fair to assume the ACCC will be seeking to actively enforce these changes from November onwards.
