Unfair contract terms reform under the Competition and Consumer Act

Consumers and small businesses have recently been afforded greater protections under the Unfair Contract Terms (UCT) reforms which took effect on 9 November 2023.

The law regarding UCTs applies to standard form contracts entered into with consumers or small businesses. Whilst UCTs could previously be deemed void and unenforceable by courts prior to this change, they are now illegal and carry pecuniary penalties under the Australian Consumer Law (ACL). For a body corporate, the maximum penalty for breach of UCT provisions is the greater of:

  • $50 million; or
  • three times the value of the benefit obtained; or
  • 30% of the company’s adjusted turnover during the breach turnover period for the offence.

Furthermore, through new Court powers a person will be prevented from entering into contractual agreements containing UCTs they have proposed through an injunction, and subsequently cannot rely on a UCT within any existing contracts.

A UCT is defined through the pre-existing test for unfairness under the Australian Consumer Law (ACL). A term is unfair if:

  1. it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and

  2. it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and

  3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Examples of common UCTs include certain automatic renewal terms such as where renewal of the contract occurs without notice, unilateral variation terms, and one-sided limitation of liability terms.

Expanded definition of 'Small Business'

A broader definition of a ‘small business’ is now in place which expands protections to cover businesses that have either fewer than 100 employees (up from 20 employees) or an annual turnover of less than $10 million. Larger businesses that engage suppliers or other small businesses under ‘standard form contracts’ must therefore pay closer attention to these thresholds to determine whether the other contracting party benefits from UCT protections.

Standard form contracts

There is further clarification with regard to what is considered a ‘standard form contract’. Some businesses have relied on various factors to categorise their contracts as non-standard form. However, the reforms clarify that factors such as whether a party was able to negotiate terms or minor changes, or could select terms from a range of options are not to be considered when assessing whether a standard form contract exists.

Businesses must ensure that they review the way they have classified their agreements to ensure that they are aware of any standard form contracts they have entered into.

Bellrock recommends that businesses using standard form contracts should conduct thorough, ideally independent reviews of their contracts to assess whether any of their terms satisfy the UCT test and may therefore expose them to regulatory action or penalties. This is especially important considering that each term in breach of the provisions incurs a penalty, so a contract could contain multiple breaches and therefore significant penalties.

Bellrock’s Advisory Team can provide insurance related contract review services to assist our clients in identifying compliance and coverage exposures. Please contact us via the form below.

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