Is your business ready for changes to the unfair contracts regime taking effect in November?
Last year, the Australian government introduced significant reforms to the rules governing unfair contract terms (UCT). These reforms will take effect on 10 November 2023 and represent a fundamental shift in policy, ushering in a new era of risk and accountability for businesses using standard form contracts.
What is changing?
The new UCT rules will apply to all standard form small business and consumer contracts. Four major changes could impact your business:
Expanded definition of “small business”: The definition of a "small business" has been significantly broadened, bringing more contracts under the UCT rules.
Outright prohibition: The new laws will prohibit UCT terms outright (rather than merely giving the courts the power to declare them void). This is a dial-mover on contracting and regulatory risk for companies contracting with small business.
Introduction of penalties and fines: Gone are the days of “rolling the dice” that an unfair term may simply be declared void. Breaches may now lead to significant penalties and fines.
Enhanced court powers: Courts now have greater power to issue orders against businesses, including injunctions and declarations that will invalidate similar provisions in your other contracts.
The new rules will take effect from in November, so businesses only have a few months left to ensure that any non-compliant terms in their contracts are rectified.
Will these changes affect me?
If your business uses a single contract for most customers without much negotiation, you likely have a standard form contract. Such contracts could be subject to the new rules. Many software-as-a-service businesses in particular will need to think carefully about their contracts under the new rules.
The UCT regime’s scope is expanding, which will now extend to small business customers with fewer than 100 employees (previously 20) or an annual turnover under $10 million (previously this was calculated by reference the contract price). The reality for many businesses is that they will now need to adopt a “lowest common denominator” approach to contracting where a material portion of the customer base will be small businesses. There are some more nuanced options, but these will likely require upfront and intermittently refreshed due diligence on your customers.
Importantly, the rules apply to standard form contracts which renew after 10 November 2023. In other words, while old agreements are grandfathered (and therefore exempt from the new rules), if a contract renews (including any auto-renewals) after the cut-over date, then they may be caught by the new rules.
One of the key challenges for businesses is that there is still no “bright line” as to what constitutes an unfair term. Some of the terms that courts have found to be unfair in a consumer or small business standard form contract include:
terms that permit you to avoid or limit performance of the contract;
terms that permit you, but not the other party, to terminate the contract;
terms that penalise the other party, but not you, for a breach or termination of the contract;
terms that allow only you to unilaterally change the terms of the contract; and
terms that permit you to change the price payable under the contract, without giving the other party a right to terminate the contract.
The above are examples of some terms that the courts have found to be unfair but is not an exhaustive list.
What happens if I get it wrong?
Under the old rules, courts only have the power to declare the unfair term void (i.e., of no effect). Historically, many businesses have simply taken the view that an unfair contract term may simply be unenforceable and have elected to “roll the dice” that they never have a dispute with the customer which puts enforceability in issue.
Now, breaches carry the risk of substantial fines. For corporations, the maximum penalties are the greater of $50 million or three times the benefit obtained. In cases where the benefit can't be determined, the maximum penalty is 30% of adjusted turnover. Individuals may face a maximum penalty of $2,500,000 for breaches. That’s a material uplift in risk from simply assuming that if the term is unfair, you may not be able to rely on it. It is also worth noting that each unfair term constitutes a separate breach, meaning that it may be possible for a corporation or individual to have multiple breaches within a single agreement.
Courts will also have more tools in their arsenal to tackle such terms. Examples of their new powers include issuing orders to mitigate loss, applying declarations to other contracts containing similar terms, or issuing injunctions that invalidate provisions of similar contracts.
What should I do?
With only a few months left before the new laws come into effect, it’s critical to act now if you rely on standard form contracts in your business.
In particular, business should review their contracts to determine:
whether they are standard form contracts with customers who may be subject to the expanded UCT regime; and
whether those contracts include any potentially unfair terms.
And remember, while older agreements are exempt, agreements which renew (even automatically, like most software-as-a-service agreements) are not exempt if they are caught by the regime.
Our legal team is ready to support you in evaluating your contracts and ensuring they align with the new rules. We can help revise provisions which still offer significant protection for your business but are fairer for both parties. For further guidance, please reach out to our team who are well placed to assist.