Home Business & Company Unfair Contract Terms post November 2023 Amendments - What Businesses need to Know to Avoid Unenforceable Clauses and Significant Penalties

Unfair Contract Terms post November 2023 Amendments – What Businesses need to Know to Avoid Unenforceable Clauses and Significant Penalties

This article will focus on the Unfair Contract Term regime to small business contracts only (not consumer contracts) and specifically summaries the laws relating to the Unfair Contract Term Regime as they exist now, examples of Unfair Contract Terms and what businesses need to do prior to the laws changing in November 2023.

The primary effect of the Amendments is that more contracts will be considered small business contracts and the primary consequence of the Amendments is the introduction of significant penalties that businesses could face if they make a contract with, or seek to rely upon, an UCT.

If your business falls within the definition of a small business, or your company is contracting with businesses that would fall within the definition, then it is important to engage a qualified Solicitor to review any standard form contracts that your business utilises before 9 November 2023, particularly in light of the new penalty regime for breaches of the UCT regime.

The Unfair Contract Term (UCT) regime under the Australian Consumer Law (ACL) was introduced in November 2016 and has provided consumers and small businesses protection against a party enforcing unfair terms in standard form contracts against them.

On 9 November 2023 the UCT regime will be amended by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Amendments).

Benefits of Using a Standard Form Contract in your Business

There are a number of benefits to using a standard form contract in your business, including:

reduction of business risks and potential disputes,
costs and time saving, by eliminating the need for custom contracts,
your employees and clients are familiar with your contracts and therefore more likely to comply with and enforce relevant provisions, and
provides for consistency in your dealings with clients and third parties.

The UCT Regime

For a business to rely upon the UCT regime, the business must have entered into a contract which is both a “standard form” and “small business contract”.

What is a small business contract?

The current definition of a small business contract under the ACL, which applies to contracts entered into up to 9 November 2023 (being the date on which the Amendments will take effect), is a contract that satisfies all of the following criteria:

the contract is for the supply of goods or services, or a sale or grant of an interest in land;
at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
either:
1. the upfront price payable under the contract does not exceed $300,000; or
2. the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

The new definition of a small business contract under the Amendments, which will apply to all contracts that are entered into, renewed or varied from 9 November 2023, is a contract that satisfies all of the following criteria:

the contract is for the supply of goods or services, or a sale or grant of an interest in land; and
at least one party to the contract satisfies either or both of the following conditions:
1. 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/or
2. the party’s turnover for the last income year that ended before or at the time when the contract is made is less than $10,000,000.

In summary, the Amendments remove the requirement to consider the upfront price payable under a contract, in favour of an assessment of the annual turnover of a party for the last income year, and increases the threshold number of employees from less than 20 to less than 100.

How is employee headcount calculated in a small business under the ACL?

Currently casuals are not included in the employee headcount, which remains unchanged by the Amendments. However, the Amendments do now provide that part-time employees are to be counted at their pro-rated full time equivalent hours. For example, an employee working 2 days per week would add 0.4 to the employment headcount.

How is Turnover Assessed?

The relevant turnover is the party’s turnover for the last income year that ended at or before the time when the contract was made.

The Amendments provide additional guidance to calculate this amount, by stipulating a party’s turnover for a period is the sum of all values or all supplies the party made during the period, other than:

supplies that are input taxed;
supplies that are not for consideration (and are not taxable supplies under section 72-5 of the A New Tax System (Goods and Services Tax) Act 1999);
supplies that are not made in connection with an enterprise that the party carries on; and
supplies that are not connected with the indirect tax zone.

What is a standard form contract?

Currently, the ACL provides little guidance as to what these words mean, however, most understand that a standard form contract is a contract containing a set of terms and conditions issued on a repetitive basis to multiple people, for example membership application forms. This contrasts with often heavily negotiated contracts, such as contracts for sale of business.

The Amendments attempt to provide further clarification of what a standard form contract is, including the addition of a provision that confirms a contract may still be ‘standard form’ even where a party has the opportunity to:

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

The above amendment suggests that a party cannot avoid the UCT regime by allowing some negotiation on less controversial clauses, while refusing to negotiate on more robust clauses such as limitation of liability.

The recent case of AIBI Holdings Pty Ltd v Virtual Technology Services Pty Ltd [2022] FCA 696 provides one example of where a Court was required to determine whether a contract was a standard form contract.

The Court concluded that the agreement was not a standard form contract because the supplier did not have “all or most of the bargaining power”, even though it may have had the “upper hand”; the contract could not be regarded as pre-prepared by the supplier, given that the terms were largely the same as previous agreements between the parties; there was no evidence that the customer was required to either accept or reject the terms, given the parties’ past history of negotiations; the customer had an effective opportunity to negotiate the terms; and there was evidence that the services offered by the supplier took into account the unique requirements of the customer.

Because the contract was not a “standard form contract”, the UCT regime did not apply.

What is an Unfair Contract Term

A term of a standard form small business contract is unfair if the term:

causes a significant imbalance in the parties’ rights and obligations under the contract;
is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
causes financial or other detriment to a party if applied or relied on.

In applying the above test, the Court may take into account such matters as it thinks relevant, but must take into account the:

extent to which the term is transparent; and
contract as a whole.

Broad Examples of Unfair Contract Terms

The ACL sets out examples of the kinds of terms that may be unfair, although these are examples only, meaning the existence of a term of a kind listed below will not necessarily be unfair in certain circumstances. These include a term permitting one party:

(but not another party) to avoid or limit performance of the contract;
(but not another party) to terminate the contract;
(but not another party) for a breach or termination of the contract;
(but not another party) to vary the terms of the contract;
(but not another party) to renew or not renew the contract;
to vary the upfront price payable under the contract, without the right of another party to terminate the contract;
to unilaterally vary the characteristics of the goods or services to be supplied under the contract;
to unilaterally determine whether the contract has been breached or to interpret its meaning; and
to assign the contract to the detriment of another party without that other party’s consent.

The decision in ACCC v Fujifilm Business Innovation Australia Pty Ltd & Anor [2022] FCA 928 provides further guidance on the types of provisions likely to be found ‘unfair’, as set out below:

automatic renewal terms;
disproportionate termination terms;
liability limitation terms;
indemnity terms;
termination payment;
unilateral variation terms; and
incorporation by reference.

While the above provides guidance on the types of terms that could be unfair, whether the particular term is unfair is highly dependent on the particular facts of the matter, including:

the application of the UCT tests as described above,
the relative bargaining power of the parties;
whether the term is truly protecting of legitimate business interests;
the terms of the contract as a whole;
how template documents are presented to suppliers, customers and clients during the sales and contracting processes; and
whether there were blanket refusals to deviate from ‘approved terms’.

Remedies and Penalties

The outcome of a standard form small business contract being held to include unfair terms has, until now, been that those terms will be considered void and unenforceable. From 9 November 2023, not only will the terms be void, but businesses can also receive penalties for contravention of the UCT provisions, with each UCT contained in a contract a separate contravention (making the combined pecuniary penalty potentially very large).

Notably, from 9 November 2023 it will be prohibited to:

make a contract with a UCT (if the UCT was proposed by that person); or
apply or rely on(or purport to apply or rely on) a UCT.

The new penalties can be up to $2,500,000 for individuals, and for corporations the greater of:

$50,000,000;
three (3) times the benefit obtained and reasonably attributable to the breach, if that can be determined; or
if the value of the benefit cannot be determined, 30% of the corporation’s adjusted turnover during the breach turnover period.

The Amendments will also provide Courts with expanded powers to void, vary or refuse to enforce any part or all of a standard form small business contract containing UCTs and the ability to prevent a person from entering into future contracts which contain a declared UCT, or relying on a declared UCT in any existing contract.

Specific Example of Unfair Contract Term – Unilateral Variation Clause

In an attempt demonstrate the Court’s likely process in determining whether a term of a small business, standard form contract is unfair, we have formulated a specific example of a term, being a unilateral variation clause, as follows:

“X may amend this Contract by written notice to Y at any time. Any other variation to the terms of this Contract must be in writing and agreed by both parties.”

In reliance upon the above clause, party X sought to vary the terms of the Contract by increasing the rates payable by Y. Y sought to rely upon the UCT regime to seek an order of the Court that the above term be declared as void, or unenforceable, such that the increased rates sought by X will not apply.

In determining whether this particular term is unfair, the Court would firstly look to determine whether the term:

creates a significant imbalance in the parties’ rights and obligations under the contract – likely yes as one party (but not the other) is entitled to vary the contract;
is reasonably necessary to protect the legitimate interests of the advantaged party – likely no, particularly given the reliance to amend rates – an example of where such a term may be reasonably necessary to protect the legitimate interests is if X were a supplier to a high volume of customer contracts that may need to be updated from time to time to respond to changes in law or regulatory conditions, and this is how the term was used; and
would cause detriment (whether financial or otherwise) to the disadvantaged party if it were applied or relied on – likely yes, particularly given the reliance to amend rates.

In applying the above test, the Court may take into account such matters as it thinks relevant, but must take into account the:

extent to which the term is transparent (a unilateral variation clause may be considered more transparent where it is limited to certain events, rather than open-ended – which would not be the case in the above example); and
contract as a whole.

The likely findings of the Court in the above case would be that the term is unfair, and assuming the contract was a small business, standard form contract, the Court would likely grant the orders sought by Y.

What do the Amendments mean to Businesses?

The effect of the Amendments is that more contracts will be considered small business contracts due to the removal of the upfront price payable consideration, the expansion of the definition to include businesses with a higher number of employees and an annual turnover of up to $10,000,000.00, and the specific inclusion of part-time employees in the assessment of a party’s employee headcount.

See our Hamish Taylor’s article on what these amendments mean to In House Lawyers here.

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The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.