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unfair contract terms regime – what is it and how does it affect you?

08 December 2021
kelly dickson natalie montalto
Read Time 4 mins reading time

The ‘unfair contract terms’ laws (as set out in the Australian Consumer Law (ACL) establish out a regime whereby a term in a consumer or small business contract will be void if the term is unfair and the contract is a standard form contract.

what is a standard form contract?

A standard form contract is a contract which has been prepared by one party (Proposer) to an agreement and is presented to the other party (Other Party) on a “take it or leave it” basis with that party having limited or little opportunity to negotiate or alter the terms.

To determine whether a contract is a standard form contract, a court will consider all relevant matters including:

  • Does the Proposer have all or most of the bargaining power?
  • Did the Proposer prepare the contract, prior to any discussion relating to the particular transaction?
  • Was the Other Party required to either accept or reject the terms, in their proposed form?
  • Was the Other Party given an opportunity to negotiate the terms?
  • Do the terms of the contract take into account the specific circumstances of the parties and the transaction?

what is considered ‘unfair’?

A term of a consumer or small business contract is unfair if:

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

Examples of terms which may be unfair include:

  • terms that enable the Proposer (but not the Other Party) to avoid or limit their obligations under the contract;
  • terms that enable the Proposer (but not the Other Party) to terminate the contract;
  • terms that penalise the Other Party (but not the Proposer) for breaching or terminating the contract;
  • terms that enable the Proposer (but not the Other Party) to vary the terms of the contract.

who does it apply to?

Presently under the ACL, the UCT Regime applies to a small business where:

  • at least one party to the contract employs fewer than 20 persons; and
  • the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

In the case of a consumer contract, the UCT Regime applies to contracts for sale or supply to an individual whose interest is predominantly for personal, domestic or household use/consumption.

ACCC action in this space

In recent years, the ACCC has kept unfair contract terms front of mind. Since the inclusion of small businesses to the UCT Regime in 2016, the ACCC has approached several Australia’s biggest traders to amend their standard small business contracts, including Uber, Fairfax media, Lendlease Property Management and Australia Post.

Most recently, the ACCC has advocated for reforms to the UCT Regime to enforce penalties against companies who continue to use unfair terms in their standard contracts with consumers and small businesses.

proposed amendments to the Unfair Contract Terms regime

The Federal Government has proposed amendments to the UCT Regime to take even more steps to protect consumers and small businesses.

In 2018, the Government published a review of unfair contracts term protections for small businesses. This review suggested that while there had been some improvements made to protect small businesses, those protections were not enough. The Government was advised to legislate greater deterrence against businesses using unfair contract terms in standard form contracts.

The result is the proposed Treasury Laws Amendment (Measures for a Later Sitting) Bill 2021: Unfair Contract Terms Reforms. The Bill proposes to strengthen the remedies and enforcement of the UCT Regime by:

  • Providing courts with the power to impose pecuniary penalties upon those who propose, apply, or rely on unfair contract terms;
  • Streamlining the court’s powers to make orders to refuse to enforce part or all of a contract with unfair terms;
  • Clarifying the court’s powers to make orders and issue injunctions;
  • Creating rebuttable presumption whereby terms that have previously been deemed unfair will automatically be considered unfair if used again in similar circumstances until proven otherwise.

The reforms will also expand the classes of contracts that are covered by the UCT Regime by increasing the small business standard form contracts that are covered.

It should be noted that the definition of small business contracts will be expanded to include contracts where at least one-party employs fewer than 100 persons and/or the party’s turnover in the previous income year is less than $10 million.

In addition, when determining whether a contract is to be considered a standard form contract, the Court must also consider whether the Proposer has entered into the same or substantially similar contract before with other parties. If so, how many such contracts has the Proposer entered into? This means that any business which proposes largely unaltered precedent “standard contracts” are on notice that such contracts may be considered standard form contracts and fall under the UCT Regime.

These amendments are still in the drafting phase, with the submission period for feedback from key stakeholders recently closing last month.

what does this mean for you?

With impending amendments and renewed ACCC focus, it’s important to ensure that your existing standard form contracts are in line with the UCT Regime. Wherever a standard form contract is in use across your business, the terms must be both fair and transparent. Until the proposed Bill becomes law, the key risk to companies with standard form contracts is court action initiated by the Other Party or the ACCC.

We recommend that standard form contracts be reviewed to ensure they do not fall foul of the UCT Regime. Please contact us if you would like your standard form contract reviewed.

stay up to date with our news & insights

unfair contract terms regime – what is it and how does it affect you?

08 December 2021
kelly dickson natalie montalto

The ‘unfair contract terms’ laws (as set out in the Australian Consumer Law (ACL) establish out a regime whereby a term in a consumer or small business contract will be void if the term is unfair and the contract is a standard form contract.

what is a standard form contract?

A standard form contract is a contract which has been prepared by one party (Proposer) to an agreement and is presented to the other party (Other Party) on a “take it or leave it” basis with that party having limited or little opportunity to negotiate or alter the terms.

To determine whether a contract is a standard form contract, a court will consider all relevant matters including:

  • Does the Proposer have all or most of the bargaining power?
  • Did the Proposer prepare the contract, prior to any discussion relating to the particular transaction?
  • Was the Other Party required to either accept or reject the terms, in their proposed form?
  • Was the Other Party given an opportunity to negotiate the terms?
  • Do the terms of the contract take into account the specific circumstances of the parties and the transaction?

what is considered ‘unfair’?

A term of a consumer or small business contract is unfair if:

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

Examples of terms which may be unfair include:

  • terms that enable the Proposer (but not the Other Party) to avoid or limit their obligations under the contract;
  • terms that enable the Proposer (but not the Other Party) to terminate the contract;
  • terms that penalise the Other Party (but not the Proposer) for breaching or terminating the contract;
  • terms that enable the Proposer (but not the Other Party) to vary the terms of the contract.

who does it apply to?

Presently under the ACL, the UCT Regime applies to a small business where:

  • at least one party to the contract employs fewer than 20 persons; and
  • the upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

In the case of a consumer contract, the UCT Regime applies to contracts for sale or supply to an individual whose interest is predominantly for personal, domestic or household use/consumption.

ACCC action in this space

In recent years, the ACCC has kept unfair contract terms front of mind. Since the inclusion of small businesses to the UCT Regime in 2016, the ACCC has approached several Australia’s biggest traders to amend their standard small business contracts, including Uber, Fairfax media, Lendlease Property Management and Australia Post.

Most recently, the ACCC has advocated for reforms to the UCT Regime to enforce penalties against companies who continue to use unfair terms in their standard contracts with consumers and small businesses.

proposed amendments to the Unfair Contract Terms regime

The Federal Government has proposed amendments to the UCT Regime to take even more steps to protect consumers and small businesses.

In 2018, the Government published a review of unfair contracts term protections for small businesses. This review suggested that while there had been some improvements made to protect small businesses, those protections were not enough. The Government was advised to legislate greater deterrence against businesses using unfair contract terms in standard form contracts.

The result is the proposed Treasury Laws Amendment (Measures for a Later Sitting) Bill 2021: Unfair Contract Terms Reforms. The Bill proposes to strengthen the remedies and enforcement of the UCT Regime by:

  • Providing courts with the power to impose pecuniary penalties upon those who propose, apply, or rely on unfair contract terms;
  • Streamlining the court’s powers to make orders to refuse to enforce part or all of a contract with unfair terms;
  • Clarifying the court’s powers to make orders and issue injunctions;
  • Creating rebuttable presumption whereby terms that have previously been deemed unfair will automatically be considered unfair if used again in similar circumstances until proven otherwise.

The reforms will also expand the classes of contracts that are covered by the UCT Regime by increasing the small business standard form contracts that are covered.

It should be noted that the definition of small business contracts will be expanded to include contracts where at least one-party employs fewer than 100 persons and/or the party’s turnover in the previous income year is less than $10 million.

In addition, when determining whether a contract is to be considered a standard form contract, the Court must also consider whether the Proposer has entered into the same or substantially similar contract before with other parties. If so, how many such contracts has the Proposer entered into? This means that any business which proposes largely unaltered precedent “standard contracts” are on notice that such contracts may be considered standard form contracts and fall under the UCT Regime.

These amendments are still in the drafting phase, with the submission period for feedback from key stakeholders recently closing last month.

what does this mean for you?

With impending amendments and renewed ACCC focus, it’s important to ensure that your existing standard form contracts are in line with the UCT Regime. Wherever a standard form contract is in use across your business, the terms must be both fair and transparent. Until the proposed Bill becomes law, the key risk to companies with standard form contracts is court action initiated by the Other Party or the ACCC.

We recommend that standard form contracts be reviewed to ensure they do not fall foul of the UCT Regime. Please contact us if you would like your standard form contract reviewed.