Unfair Contract Terms – Is there a new Problem?

Since our article in November 2018, the Unfair Contracts Terms (“UCT”) regime^[1] has been strengthened to apply to a much greater pool of contracts, and so some businesses which previously were not affected by it, now suddenly find themselves in potentially very dangerous waters.  The principles and recommendations in that article have not diminished at all, but the adverse repercussions for putting a contract with UCTs before a small business or individual have been substantially strengthened.

So, what has changed?  Well – the UCT regime now has some very sharp teeth!

Illegality and serious penalties

From 10 November 2023, UCTs are prohibited and, unlike the previous regime which merely made offending provisions unenforceable and void, entities which now propose contracts containing UCTs will be subject to very substantial penalties.  For companies, the penalties can be up to $50 million or 3 times the value of the benefit obtained (whichever is greater) or a figure representing 30% of adjusted turnover.  For individuals, the penalties can be up to $2.5 million.

Increased powers of a Court

Under the new UCT regime, a Court is not limited to declaring UCTs unenforceable and void, but now, in addition to handing out large monetary penalties, the Court may exercise a discretion to make injunctive orders against an entity proposing or seeking to rely on UCTs, and also make orders for loss and damage sustained by those adversely affected by the UCTs.

Criteria for assessment of UCTs

In deciding whether or not a contract is a standard form contract, the Court is no longer hamstrung by considerations of whether a party had an opportunity to negotiate minor changes, delete terms or select from a set number of options.  Importantly, it will have no regard to the categorisation of a document by its proposer as being “non-standard form”.

Has the test for UCTs changed?

The short answer is no!  It remains the same as previously where it is necessary to examine the specific commercial circumstances of the arrangement between the parties.  Particularly where:

• The contract is a standard form consumer or small business contract (although the definition of small business has greatly expanded).
• The UCT causes significant imbalance in the rights and obligations of the contracting parties.
• The UCT would cause undue detriment to one party to the advantage of the other.
• The UCT is not reasonably necessary to protect the legitimate interest of the proposing party.

Don’t even contemplate these terms(!):

• Automatic roll-over or renewal.
• Unreasonable exit or early termination fees.
• Termination or suspension unilaterally or on substantially different criteria than for the other party.
• Broad indemnities granted by one party to the other without reciprocity.
• Wide definitions of loss and damage for one party but not the other.
• Extensive rights of one party to change service or product descriptions.
• Unreasonable rights to vary fees.
• Exclusion of refunds.

If you need any advice or assistance on the topic of Unfair Contract Terms, please do not hesitate to contact our team.

[1] In this article, we are concerned with the expanded regime contained within the Australian Consumer Law (“ACL”).  The ASIC Act has specific UCTs which relate to the providers and recipients of financial services, and has not been recently amended.  Penalties under the ASIC Act are significantly less than under the ACL.

Author: Tim Dixon (Special Counsel)