The unfair contract terms (UCT) regime under the Australian Consumer Law (ACL) amendments will come into effect from the 9th of November 2023, including a significant increase in penalties

A brief overview of the amendments was provided earlier this year. This article provides a reminder of some upcoming amendments, an overview of the UCT regime, and steps a business can take to be ready for the amendments.

What is the purpose of the UCT regime?
The UCT regime seeks to prevent unfair contract terms being included in standard form contracts in an effort to protect consumers and small business.

What is an unfair contract term?
A term is unfair if the term meets all of the following, the term:
• causes a significant imbalance between the rights and obligations of each party; and
• is not reasonably necessary to protect the advantaged party’s legitimate business interests; and
• would be detrimental (financial or otherwise), to another party if applied or relied on.

When deciding if a contract term is unfair, a court will also consider if the contract term is transparent (ie, if the language is plain, if it is legible, presented clearly and readily available to a party affected by the term), and will also consider the contract as a whole.

What are some common terms that may be unfair?
Some common contract terms that may be unfair include terms that enable a supplier to unilaterally vary the price and some automatic renewal clauses.

What contracts are subject to the UCT regime?
The UCT regime applies to standard form consumer contracts and standard form small business contracts.
Importantly, a standard form contract includes contracts where there is negotiation, but there are minor or insubstantial changes, or where some terms may be selected.
A consumer contract, for the purpose of the UCT regime, is a contract for the supply of goods or services, or a sale or grant of an interest in land, to an individual whose acquisition is wholly or predominantly for personal, domestic or household use or consumption.
Under the UCT regime amendments, the definition for a standard form small business contract has changed:

  • currently, a small business contract must be for the supply of goods or services or a sale or grant of an interest in land, and when the contract is entered into, one party to the contract employs fewer than 20 people and either the upfront price payable for the contract does not exceed $300,000 or, if the contract is longer than 12 months, the upfront price payable does not exceed $1 million (the upfront price payable is the amount disclosed before or when the contract was entered into, as the amount payable for the supply of goods or services, or the sale or a grant in an interest of land).
  • from 9 November 2023, a small business contract must be for the supply of goods or services or a sale or grant of an interest in land, and when the contract is entered into, at least one party to the contract carries on a business and employs fewer than 100 persons, and the party’s turnover for the last income year that ended at or before the time the contract is made, is less the $10,000,000.

What happens if a contract subject to the UCT regime has an unfair term?
A court can declare an unfair term void on application by a party to a consumer contract or a small business contract, or on application by the regulator, however, the remaining terms of the contract will continue.
The business relying on the unfair term may also be ordered by the court, to pay compensation to the consumer or the small business that has suffered loss or damage as a result of relying on the unfair term or the application of the unfair term.
From 9 November 2023, there will be significant changes regarding the consequences of unfair contracts in consumer contracts and small business contracts.
A substantial change is that it will be prohibited for a person to propose an unfair term in a consumer contract or a small business contract.
Further, if there is an unfair term in a consumer contract of small business contract, then the body corporate or the individual proposing the unfair term can be ordered by a court to pay significant penalties (a maximum penalty of $2.5 million for individuals, and a maximum penalty for body corporates of the higher of $50 million, or three times the value of the benefit directly or indirectly received by the body corporate or if that value cannot be identified, 30 percent of the annual turnover of the body corporate for the 12 month period after the offence). Further, a separate contravention occurs for each unfair term proposed by the body corporate or individual.
Other changes also commence from 9 November 2023 which provide further protections for consumers and small business, for example, the issue of injunctions to prevent a person from making any future standard form contracts containing the same term or a term that is similar.

What steps can a business take?
With the upcoming changes to the UCT regime, it is prudent for businesses to review current standard form contracts for compliance with the UCT regime and make the necessary amendments.

The key takeaways are:

  • the UCT regime benefits consumers and small business by encouraging fair contract terms and, from 9 November 2023, by prohibiting unfair contracts in standard form contracts;
  • from 9 November 2023 the meaning of small business contract is expanded, providing greater protections for small business;
  • if a contract is declared to be void, then the remainder of the contract will continue and the court may order that compensation for loss and damage be paid to the consumer or small business;
  • from 9 November 2023, significant penalties will also apply for the failure to comply with the UCT regime, with each unfair term being a separate contravention; and
  • if a business has a standard form contract it is recommended to review the standard form contract for compliance with the UCT regime and to make the necessary amendments.

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This document is intended for general information purposes only and should not be regarded as legal advice. Please contact Industry Legal if you require legal advice.