November 2023 – Unfair Contract Term regime expands to most business contracts
In November 2022 the Federal Government passed legislation extending the application of Unfair Contract Term legislation to the majority of standard form business contracts used in Australia and introduced penalties for those that incorporate unfair terms in standard form contracts. These changes take effect from 9 November 2023.
Unfair Contract Term (“UCT”) laws are found in the Australian Consumer Law and the ASIC Act. The UCT legislation has been in place since 2010 regulating terms in standard form contracts used by small business with the UCT regime being extended to insurance contracts from 5 April 2021.
From November 2023 the application of the UCT laws will be significantly expanded with a change to the definition for ‘small business’ and a different approach to determine what is a ‘standard form’ contract.
The new definition of small business, will see the UCT laws apply to contracts used by all businesses with less than 100 employees (previously 20), that have a turnover of less than $10,000,000.
The laws will apply to all standard form contracts irrespective of their value.
The laws will apply to a contract where one party to the contract is a small business even where the other is not. The expansion of the definition of small business will ensure the majority of standard form business contracts are captured by the UCT regime.
When deciding whether a contract is a standard form contract it is necessary to determine whether a party had an opportunity to genuinely negotiate the contract and minor or insubstantial changes will be ignored when determining whether the contract is standard form. The right to select from a range of terms within a contract will also be irrelevant to that consideration.
Business that include or rely on an unfair contract term will also face penalties. The maximum is the greater of:
- $50 million
- three times the value of the benefit (if able to be determined); or
- 30% of the adjusted turnover of the business during the period of the breach, or the previous 12 months, whichever is longer.
Individuals involved in the conduct will face a maximum penalty of $2.5 million.
Unfair contract terms are those that:
- cause a significant imbalance in the parties’ rights and obligations
- Are not reasonably necessary to protect the legitimate interests of a party; and
- would cause detriment if relied on.
In determining whether a term of a contract is unfair it is necessary to look at the extent to which the term is transparent and the contract as a whole.
A term is transparent if the term is:
- expressed in reasonably plain language; and
- legible; and
- presented clearly; and
- readily available to any party affected by the term.
A term of a contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise.
Examples of unfair terms include:
- a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
- a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
- a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
- a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
- a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
- a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
- a term that permits, or has the effect of permitting, one party unilaterally 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 term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
- a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
- a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
- a term that limits, or has the effect of limiting, one party’s right to sue another party;
- a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
- a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract.
The Federal Court,s decision in late 2022 in ACCC v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928 demonstrates the reach of UCT laws with the Court finding a raft of terms included agreements were unfair including those that:
- Required payment even if goods were not delivered
- Permitted a unilateral variation in price
- Permitted a unilateral variation of terms
- Allowed for automatic renewal without notice
- Incorporated terms in extraneous documents not readily available
- Permitted termination on notice and for cause but did not provide the customer with the same right
- Capped Fuji’s liability but not the customers
- Required payments whilst services were suspended
- Imposed default termination payments
- Imposed indemnities that were not limited to the consequences of acts of the customer.
The Federal Court declared that 38 contract terms used in contracts entered into by Fujifilm Business Innovation Australia or Fujifilm Leasing Australia with many thousands of small businesses were unfair, void and unenforceable. Fuji was ordered to stop enforcing the terms and to cease using these terms in 11 types of standard form contracts with small businesses for five years.
There are interesting times ahead.
The expanded definition of small business and new penalties for the use of unfair contract terms will see businesses revisit their standard terms and conditions to deliver a balanced approach to risk allocation and the imposition of obligations.
We will see more disputes over contract terms across a wider class of contracts with the expanded application of the UCT regime.