Time to prepare! Ensuring compliance with the revised Unfair Contract Terms Regime in Australia

Any business in the retail industry, including manufacturers, wholesalers and retailers, that enters into standard form consumer and small business contracts with customers in Australia is on notice to ensure that by 9 November 2023, their standard form contracts are in compliance with the requirements of the new unfair contract terms regime in Australia (which forms part of the Australian Consumer Law (ACL)) (UCT Regime). As of 10 November 2023, significant pecuniary penalties will apply in relation to the use of unfair contract terms in standard form contracts entered into with Australian customers.

What is the UCT Regime?

Class of Contracts Covered

The UCT Regime regulates standard form contracts for goods or services that are supplied under ‘consumers contracts’ or “small business contracts”.

A ‘standard form contract’ is generally considered to be one that is offered on a ‘take-it or leave-it basis’, without there being a genuine opportunity for the counterparty to negotiate the terms of the contract. The related terms of ‘consumer contract’ and ‘small business contract’ are defined in the UCT Regime and are important on the basis that they indicate the class of contracts currently covered by the UCT Regime:

  • a ‘consumer contract’ is defined as a contract for goods or services that is entered into with an individual whose acquisition of the goods or services is wholly or predominantly for personal, domestic or household use or consumption. In most cases, this assessment is fairly clear based on the relevant facts (for example, if a customer is acquiring an item of clothing, it’s likely they will be acquiring the relevant goods for their own personal use and the relevant contract will be a ‘standard form consumer contract’ for the purposes of the UCT Regime); and
  • a ‘small business contract’ is currently defined as one that is entered into with a business with fewer than 20 employees, or where the upfront price payable is less than $300,000 (or $1 million, if the contract is for more than 12 months), but will, as of 10 November 2023, be expanded to cover any business with fewer than 100 employees or with an annual turnover of less than $10 million (either of which can be satisfied in order to fall within the definition). Importantly, a contract may be considered to be a ‘small business contract’ irrespective of whether the supply of the relevant goods or services is to the relevant business, or from the business (to a customer); the requirement is only that one of the parties involved in the relevant transaction meets the small business definition threshold outlined above.

As discussed in more detail below, the class of contracts covered by the UCT Regime is set to be considerably expanded once the key changes outlined below come into effect.

Determining Whether a Term is Unfair

Under the UCT Regime, a term of a standard form consumer or small business contract is considered to be unfair if it:

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

Importantly, each of these three elements must be satisfied in order for the relevant term to constitute an unfair contract term for the purposes of the UCT Regime. Whilst the ACL provides examples of terms that may be considered to be unfair contract terms (e.g. unilateral variation, renewal or termination rights), each term needs to be assessed against the 3-limb test outlined above on a case-by-case basis. Many of these example terms are commonplace in customer contracts used across the retail industry in Australia and will therefore need to be carefully reviewed for compliance purposes before the changes come into effect.

What are the key changes coming into effect?

The key changes coming into effect on 10 November 2023 include the following:

  • Introduction of prohibition: Currently, if a term is declared to be unfair by a court, the term will be held to be void and unenforceable (i.e., the parties cannot rely on it). However, once the new changes take effect, parties will be prohibited from entering into, applying or relying on (or purporting to rely on) a standard form contract which contains an unfair contract term. Importantly, each unfair contract term which is included in a standard form contract will constitute a separate contravention under the UCT Regime.
  • Imposition of monetary penalties: Australian courts will have the power to impose monetary penalties in relation to a contravention of the UCT Regime. The maximum penalties for a contravention of the revised UCT Regime include the following:
    • for an individual - $2,500,000; or
    • for a body corporate – the greater of: (a) $50 million; (b) three times the value of the benefit of the unfair contract term (if the value of the benefit can be determined by the court); or (c) 30% of the annual turnover of the body corporate in the preceding 12-month period (if the value of the benefit cannot be determined by a court).
  • Broadened scope of the regime: The new UCT Regime will broaden the class of contracts covered by the UCT Regime by:
    • removing the contract value thresholds for ‘small business contracts’ outlined above; and
    • increasing the small business definition to be one that employs fewer than 100 people or has an annual turnover of less than $10 million (either of which can be satisfied in order to fall within the definition).

The broadening of the class of contracts covered by the UCT Regime is particularly important for both wholesalers and retailers that deal with small businesses in connection their day-to-day activities in Australia. The terms of any such contracts are now likely to fall within the ambit of the UCT Regime and will need to be carefully reviewed for compliance with the UCT Regime before the changes outlined above come into effect.

UCT Compliance is an ACCC Enforcement Priority

Importantly, the Chair of the Australian Competition and Consumer Commission (ACCC), Gina Cass-Gottlieb recently confirmed that compliance with the new UCT Regime will be an enforcement priority for the ACCC in 2023/2024.

In a speech to the Committee for Economic Development of Australia (CEDA) on 7 March 2023, Ms Cass-Gottlieb noted that:

‘In anticipation of the new provisions, [the ACCC is] undertaking a review of business terms and conditions across a number of different sectors. This proactive review will be used as the basis for future enforcement cases.’

This indicates that the ACCC will be proactively reviewing standard form contracts in a number of sectors throughout 2023 and 2024 and taking enforcement action against those businesses which it considers to be in contravention of the UCT Regime. This could include businesses operating in the retail and consumer sector in Australia.

Conclusion

These changes take effect on 10 November 2023. Any individuals or entities in the retail industry that use standard form consumer or small business contracts with their Australian customers will need to have those contracts carefully reviewed before the prohibition, and the monetary penalties outlined above, relating to the use of unfair contract terms apply. Clients should also be mindful that the changes to the UCT Regime apply to new contracts entered into after this date, as well as contracts that are varied or renewed after this date.

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