UNFAIR CONTRACT TERMS

The unfair contract terms (UCT) regime under the Australian Consumer Law (ACL) can benefit small businesses by providing that where a term of a standard form small business contract is unfair, that term will be void

This protects small businesses by incentivising businesses to identify contract terms that are unfair and amend those terms to avoid potential legal proceedings and potential reputational damage. 
Conversely, it also means that if a small business has a standard form contract that meets the definition of a ‘consumer contract’ or a ‘small business contract’, it will be subject to the UCT regime.
This article provides a reminder of the UCT regime and a brief overview of an upcoming change to the UCT regime.

What is a UCT?
A term is unfair if the term meets all of the following:
• 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
• it would be detrimental (financial or otherwise), to another party if applied or relied on.
Additionally, whether the terms are transparent is also taken into consideration (ie. if the language is plain, if it is legible, presented clearly and readily available to a party affected by the term). The contract as a whole is also considered.

What is a small business contract?
For the purpose of the UCT regime, a contract is a small business contract if all of the following are met:
• the contract is for the supply of goods or services or the sale or grant of an interest in land; and
• when the contract is entered into, one party to the contract employed fewer than 20 people; and
• either the upfront price payable 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).
If all the above are met, then the contract is a small business contract. If a small business contract is also a ‘standard form contract’, then the contract will be subject to the UCT regime (see directly below).

How do I know if it is a standard form contract?
It will be presumed that a contract is a standard form contract unless another party proves otherwise. Several factors can be considered in proving that a contract is a standard form contract, including:
• if one party has most of the bargaining power;
• the contract was prepared without discussion before it was entered into;
• whether there was negotiation; and/or
• if the terms could only be accepted or rejected without change.

What is an example of a UCT?
The ACL provides some examples of terms that may be unfair (depending on a consideration of all relevant factors), including a term that only allows one party to terminate the contract, that only penalises one party for breach of contract or termination, or that allows only one party to vary the terms.
Although the terms listed are not necessarily unfair, they give direction towards terms that should be carefully considered to determine if it is unfair in consideration of the circumstances.

What happens if a term is unfair?
The term will be void and no longer apply to the parties, however, the remainder of the contract will continue without the void term if possible. 

What are the upcoming changes to the UCT regime?
The Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) also contains an UCT regime that largely reflects the UCT regime in the ACL but applies to contracts that are financial products or provide for financial services. The UCT regime in the ASIC Act will be extended to insurance contracts (with some exceptions and additional considerations), entered into on and from 5 April 2021, or if renewed after that date, on and from the date of renewal.

Takeaways
The key takeaways are:
• the UCT regime can benefit small businesses by incentivising standard form contracts to be more fair;
• if a business has a standard form contract they should consider if any of the terms may be unfair;
• if a term is unfair it can be declared void by a court and no longer apply, however, the remainder of the contract will remain on foot; and
• under the ASIC Act the UCT regime will be extended to insurance contracts (with some exceptions and considerations) on and from 5 April 2021.
Please contact Industry Legal Group if you would like any further information, including information regarding the definition of a ‘consumer contract’.

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

AAAA Member Benefits
Industry Legal Group provides advice to members on commercial law matters. If you have any questions relating to the above information, please contact Industry Legal Group on 1300 369 703 or
aaaa@industrylegalgroup.com.au