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From 9 November 2023, major changes to the ‘unfair contract terms’ (UCT) regime under Schedule 2 – Australian Consumer Law of the Competition and Consumer Act 2010 (Cth) took effect following the introduction of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022.

The changes introduced substantial penalties and other changes relating to UCT in standard form contracts with consumers and small businesses.

Which contracts does the UCT regime apply to?

The UCT regime will apply to a contract that satisfies the following requirements:

  • the contract is ‘consumer contract’ or a ‘small business contract’; and
  • the contract is a ‘standard form contract’ (a template contract where most terms are set in advance with little or no negotiation between the parties and typically offered on a “take it or leave it” basis).

A consumer contract is a contract for the supply of goods or services to an individual whose acquisition is wholly or predominantly for personal, domestic or household use or consumption.

A small business contract is a contract where at least one party to the contract satisfies either or both of the following conditions:

  • the party makes the contract in the course of carrying on a business and at a time when the party has fewer than 100 employees; and
  • the party’s annual turnover for the last income year that ended at or before the time when the contract is made is below $10 million.

This change significantly increases the number of small business contracts in standard form that fall under the scope of the UCT regime. Under the previous UCT regime, a small business contract required at least one of the parties to employ fewer than 20 employees and either the upfront price payable under the contract did not exceed $300,000 or if the contract had a duration of more than 12 months, the upfront price payable did not exceed $1 million. There is no longer a requirement for the contract to have an upfront price payable.

A standard form contract is not defined in the UCT regime. However, if a party alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless the other party proves otherwise. The UCT regime sets out the matters that the Court must take into account in determining whether a contract is a standard form contract.

These include:

  • whether one of the parties has all or most of the bargaining power;
  • whether one of the parties has made another contract, in the same or substantially similar terms, prepared by that party, and, if so, how many such contracts that party has made;
  • whether the contract was prepared by one party before any discussion relating to the transaction;
  • whether the other party was, in effect, required to accept or reject the terms of the contract in the form presented to the party; and
  • whether the other party was given an effective opportunity to negotiate the terms of the contract.

A contract may be determined to be a standard form contract despite if there was an opportunity for:

  • either party to negotiate changes to the contract that are minor or insubstantial;
  • either party to select a term from a range of options determined by the other party; or
  • a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

The UCT regime will not apply to a term of a contract that:

  • defines the main subject matter of the contract; or
  • sets out the upfront price payable under the contract; or
  • is required to be included by a law of the Commonwealth or of a State or Territory.

What is an unfair contract term?

A contract term will be unfair under the UCT regime if the term:

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

In determining whether a term is unfair, the Court may take into account any such matters as it considers relevant. However, the Court must take into account:

  • the extent to which the term is transparent (a term that is expressed in reasonably plain language, legible, presented clearly and is readily available to any party affected by the term); and
  • the contract as a whole.

The UCT regime sets out a guide of the kinds of terms that may be unfair (known as the grey list). These terms include:

  • a unilateral right to avoid or limit performance of the contract;
  • a unilateral right to terminate the contract;
  • a penalty on a party for a breach or termination of the contract;
  • a unilateral right to vary the terms of the contract;
  • a unilateral right to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
  • a unilateral right to determine if the contract has been breached or to interpret its meaning; and
  • a clause that limits a party’s right to sue the other.

The Court will consider if a term is ‘unfair’ taking into account the transparency of the term, the contract as a whole, and other relevant factors.

What penalties apply for a breach?

The changes introduce new substantial penalties for unfair terms. Under the previous UCT regime, the Court had the power to void any term that was an ‘unfair contract term’ in a standard form contract, but it was not an offence and the Court did not have the power to impose penalties. Under the changes to the UCT regime, penalties can be imposed on a business that include UCT in their standard form contracts. The maximum penalty for a breach for individuals is up to $2.5 million and, for a company, is the greater of:

  • $50 million;
  • if the Court can determine the value of the benefit that the company obtained directly or indirectly and it is reasonably attributable to the act or omission – 3 times the value of that benefit; and
  • if the Court cannot determine the value of the benefit, 30% of the company’s adjusted turnover during the period of the breach.

When do the changes take effect?

The amendments to the UCT regime will apply to:

  • a new contract entered into on or after 9 November 2023 (Commencement Date);
  • an existing contract that is renewed on or after the Commencement Date; and
  • an existing contract that is varied on or after the Commencement Date (except that it will only apply to a term as varied or added from the date of the variation).

Impact of the changes on businesses

A significant number of businesses across a wide range of industries will be impacted by these changes to the UCT regime, given the widespread use of standard form contracts in business dealings. For businesses in the property industry such as property owners, developers, landlords, tenants, property managers and builders, the changes will apply to standard form contracts, including:

  • commercial leases;
  • standard form industry contracts for the sale and purchase of land;
  • ‘off-the-plan’ contracts;
  • option agreements;
  • agency agreements; and
  • construction contracts (including standard industry form contracts, such as Standards Australia, Housing Industry Association and Master Builders Association).

Landlords and tenants should be mindful that the amended UCT regime will apply to new leases entered into, or the renewal (or extension) of existing leases entered into, on or after the Commencement Date. Any unfair terms contained in existing leases that are renewed should be removed as part of the renewal or variation of lease process. Landlords should have their standard lease templates reviewed to determine if there are any unfair terms. Examples of lease terms that may be considered unfair under the UCT regime include:

  • A right of the landlord to enter the premises at any time without giving any reasonable notice to the tenant or without any reasonable basis for the entry.
  • A right of the landlord to terminate the lease for a tenant’s breach without giving the tenant any reasonable period to remedy the breach.
  • A right of the landlord to withhold consent to any tenant’s request at the landlord’s absolute discretion.
  • A clause that deems the tenant to be holding over as a monthly tenant with rent payable to the landlord until the tenant has complied with its end of lease obligations relating to make good and reinstatement.
  • A right of indemnity in favour of the landlord in wide terms and without any exclusions for negligence, acts or omissions of the landlord.
  • A clause that excludes the landlord from any liability to the tenant for the landlord’s negligence.

Developers should have their standard form ‘off-the-plan’ contracts reviewed to ensure that they do not contain any unfair terms. Examples of terms in ‘off-the-plan’ contracts that may be considered unfair under the UCT regime include:

  • A right of the developer to terminate the contract if a developer condition is not fulfilled (including development approval, land division or practical completion) but not giving any corresponding right of termination to the purchaser.
  • A right of the developer to terminate the contract at any time and without giving any reason to the purchaser.
  • A right of the developer to unilaterally change the plans, specifications or community scheme documents (such as by-laws and scheme descriptions) without any reasonable limitations or, where appropriate, giving a right of termination to the purchaser.
  • A clause that gives the developer a right to unliterally extend the due dates to satisfy developer conditions or the sunset date (the maximum date on which all developer conditions under the contract must be fulfilled) for such period as the developer determines.
  • A sunset date that is open-ended and lacks transparency.

How can we help?

If your business is using standard form contracts, these should be reviewed to ensure that the contracts do not contain unfair terms. Substantial penalties may apply for non-compliance with the UCT regime. We can assist businesses in ensuring that their standard form contracts comply with the new UCT regime. For further information, you can contact me directly, or send your enquiries to [email protected], or call us on 8414 3400.