Unfair Contract Term reforms are here – will your business be caught in the fray?
Posted on September 11, 2023
10 November 2023 marks “d-day” for the commencement of further reforms to the Unfair Contract Term (UCT) regime, and so it is timely for all businesses to review their standard contracts and consider what, if any, changes should be made.
These reforms mark the largest change to the UCT regime since the 2016 amendments, and seek to “even out” the playing field between businesses and their customers – aiming to find the balance between commercial interests and consumer rights.
As a reminder, the UCT regime applies to standard form contracts, which although are not strictly defined, includes those contracts which comprise a set of standard terms of conditions used repetitively and provided to multiple people. An example would include a credit application for the supply of goods and services. As for the definition of a UCT, we set that out in further detail below and include some common terms that may be caught.
What's changing, and how might it affect your business?
The UCT reforms will apply to all contracts entered into, renewed or varied on or after 10 November 2023. The following sets out important changes to be considered by businesses:
From 10 November 2023, the definition of a “small business” will expand to include a business which (a) has less than 100 employees, OR (b) has an annual turnover of less than $10m. This means that many more businesses will be a “small business” for the purposes of the UCT regime, and will benefit from the protections offered.
Standard form contracts
When determining whether or not a contract is a “standard form contract”, from 10 November 2023 the Court will no longer consider:
- if it was possible to negotiate “minor changes” in the contract; and / or
- if there was an opportunity (at all) to negotiate terms in the contract.
Businesses that have solely relied on the “opportunity to negotiate” argument to avoid the UCT regime will no longer be able to do so.
Illegality of UCTs
UCTs will, from 10 November 2023, be illegal. That means that if a contract contains a UCT, not only will the UCT be void and unenforceable – each UCT found in a contract will also attract a monetary penalty.
As to those penalties - the maximum penalty (per breach) was significantly increased in November 2022 to $2.5m for individuals, and, for businesses, the greater of (a) $50m, (b) x3 the value of the benefit obtained, or (c) 30% of the adjusted turnover for penalties.
Businesses now face substantial monetary consequences for breaches of the UCT regime.
The powers of the Court when dealing with a UCT regime matter will expand come 10 November 2023 – not only will a Court be able to (a) void a term within a contract, and (b) impose monetary penalties, it will also be able to:
- stop a business from relying on a UCT in its future contracts (or any existing contract – whether or not that contract is the subject of the Court application); and
- make orders to deal with OR prevent / reduce loss and damage.
What can you do to avoid being caught by the reforms?
There is no strict rule about what “is” and “isn’t” a UCT. Common terms that may be caught by the UCT regime include:
- automatic rollovers;
- unilateral rights (renewal, termination, amendments to terms);
- excessive early termination fees;
- one-sided liability limitations / indemnities;
- unfair payment terms.
To mitigate exposure to a UCT, your business should ensure that, as a general practice:
- There is open and upfront communication with customers about changes to standard terms and conditions, providing advance notice prior to those changes coming into effect.
- Customers can simply terminate contracts should they not accept notified changes.
- There is a limitation on excessive “fees” for early termination within terms.
- “Unilateral” rights set out in your terms and conditions (such as, for example, the ability to unilaterally terminate a contract without notice) are limited, or include a requirement for notice.
- Terms and conditions clearly set out your “processes”, including how charges are raised, how and when notice is to be given, how a customer can challenge an invoice, and so on.
Most importantly, the time to review your contracts is now. Failure to proactively take steps to ensure compliance with the UCT reforms may otherwise leave your business exposed to serious financial consequence.
Lynch Meyer’s team has extensive experience in reviewing and preparing terms and conditions to ensure they comply with all relevant legislation – including the UCT regime. If your business needs its terms reviewed, or you have any questions about the UCT reforms, please contact us.