Enhanced unfair contract term obligations imminent

Australia's enhanced 'unfair contract terms' laws (UCT regime) come into effect on 9 November 2023, covering a broader class of existing and future contractual arrangements than ever before.

The reforms have important implications for organisations of all sizes, and include significant civil penalties for non-compliance.

Understanding the unfair contract term regime

Background

The UCT regime is designed to protect a party to a contract against unfair contract terms. For an in-depth overview of the key changes to the UCT regime, please refer to our previous insight.

What is prohibited?

A person who enters into a consumer contract or small business contract, by way of a standard form contract, and proposes a term that is 'unfair' will be in breach of the UCT regime. Additionally, a person will breach the UCT regime where they apply or rely upon an 'unfair' contract term.

An 'unfair' contract term is one which:

• would cause a significant imbalance in the parties' rights and obligations; AND
• is not reasonably necessary to protect a party's legitimate interests; AND
• would cause detriment (financial or otherwise) to a party if it were to be applied or relied upon.

When does the regime apply?

The UCT regime applies to contracts concerning:

• the supply of goods or services;
• the sale or grant of an interest in land;
• a financial product; or
• the supply or possible supply of financial services.

Importantly, the UCT regime will apply to existing contracts that are renewed or varied after 9 November 2023.

What is changing?

The Treasury Laws Amendment (More Competition Better Prices) Act 2022 (Cth) significantly expands the class of contracts covered by the UCT regime and introduces new penalties for breaches of the regime.

Scope of the regime

Under the Competition and Consumer Act 2010 (Cth) (Competition and Consumer Act) the concept of 'small business contract' has been amended and will cover contracts where either party to a contact:

• possesses fewer than 100 employees (increased from 20 employees); or
• had a turnover of less than $10 million in the previous income year.

Furthermore, the monetary contract value threshold presently in the Competition and Consumer Act will be removed.

The Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) has undergone similar changes. However, rather than abolishing the monetary contract value threshold for small business contracts, the threshold has been increased to up to $5 million for a contract to fall within the UCT regime.

Penalties

The maximum penalty for corporations, which have been introduced into the Competition and Consumer Act for breaches of the UCT regime, is the greater of:

• $50 million;
• three times the value of the benefit obtained from and attributable to the breach; or
• 30% of the corporation's adjusted turnover for the 12-month period prior to the contravention, where the value obtained/attributable to the breach cannot be determined.

The maximum penalty introduced into the Competition and Consumer Act for breaches of the UCT regime by individuals is $2,500,000. Previously the Competition and Consumer Act applied no pecuniary penalties as any prohibited 'unfair' contract term was merely deemed void.

Implications

Heightened regulatory scrutiny

Given the increased scope and penalties under the UCT regime, it should come as no surprise that the Australian Competition and Consumer Commission's (ACCC) has identified "Unfair contract terms in consumer and small business contracts" as one of its enforcement and compliance priorities for 2023-24.

In fact, a recent media release from the ACCC indicates it has investigated potential unfair contract terms applied by suppliers in the fertiliser industry and consequentially directed such suppliers to amend the relevant contract terms. Therefore, businesses should be aware that the ACCC is actively investigating potential UCT regime breaches and any decision to delay compliance may come with substantial consequences.

Support

Rapid review service

With the 9 November 2023 UCT regime commencement date fast approaching, businesses should ensure that their standard form contracts are compliant with the UCT regime to avoid heightened regulator scrutiny and financial penalties. Businesses were granted 12 months from 9 November 2022 to prepare for the enhanced UCT regime.

If you require support in the final months to prepare for the enhanced UCT regime, Lander & Rogers provides a rapid review service to assess standard-form contracts for unfair-contract-terms compliance. For advice and support in relation to the UCT regime and other regulatory issues, contact our experienced team of competition and consumer law practitioners.