On 9 November 2023, reforms to the laws surrounding unfair contract terms took effect in both Australian Consumer Law (ACL) and the ASIC Act.
The effect of these reforms is that the scope of what an unfair contract term (UCT) is has been expanded and the penalties for including an UCT have increased.
What is an Unfair Contract Term?
A term in a contract is unfair if it:
- Causes a significant imbalance in the contract;
- Is not reasonably necessary to protect the legitimate interests of the party benefitting from the term; and
- Could cause detriment to a small business.
An example of an UCT could be one that enables only one party in a contract to terminate whilst excluding the other party to that same right.
Current Legislation regarding UCTs
Under the previous legislation contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA), a term in a consumer contract or a small business contract was declared to be void if the term was found to be unfair (using the criteria listed above) and if the term was in a standard form contract.
A contract was considered to be a small business contract if:
- The contract was for the supply of goods or services, or for the sale or grant of an interest in land; and
- At the time the contract was entered into, at least one of the parties to the contract had fewer than 20 employees; and
- Either the upfront price payable under the contract did not exceed $300,000 or the contract had a duration of more than 12 months and the upfront price payable under the contract did not exceed $1,000,000.
Reforms to Law Surrounding Unfair Contract Terms
Importantly, the reforms have changed the definition of a ‘small business’. Now, these changes apply to an unfair contract term in a small business contract specifically that (at the time the contract is entered into):
- Has at least one party that is an individual or a small business (which has fewer than 100 employees OR an annual turnover of less than $10 million); and
- Is a standard form contract (has been prepared by one party and is offered largely on a ‘take it or leave it’ basis, without or with little negotiation between the parties).
The threshold for the price payable under the contract has been removed and as such the UCT regime likely applies to all small business contracts regardless of their value, provided one of the parties to the contract falls within the criteria stated above.
Increased Financial Penalties
Currently, if a corporation is found to have included an UCT in their standard form contracts they will incur a penalty of the greater of:
- $10 million;
- Three times the value of the benefit obtained from the unfair term; or
- Where the value of the benefit obtained is unable to determined, 10% of the annual turnover in the 12 months before the act or omission.
If it is an individual who has been found to have included an UCT in their standard form contract, the penalty is currently $500,000.
Under the new legislation the penalties for corporations have significantly increased to be whichever amount is greater of either:
- $50 million;
- Three times the value of the benefit obtained; or
- Where the value of the benefit obtained is unable to be determined, 30% of the adjusted turnover during the breach turnover period for the act or omission.
The penalty for an individual found to be in breach of the UCT regime has also drastically increased to $2.5 million.
If you require a review of your standard form contracts please contact OpenLegal at firstname.lastname@example.org or fill out the enquiry form below for a free quote. Protect your business and ensure you are not found to be in breach of the UCT regime.