Unfair Contract Terms Law in Australia – New Era

BDC Partners franchise Law Revised Unfair Contract Terms Regulations

In the realm of consumer rights and legalities, the Unfair Contract Terms (UCT) law stands as a pivotal segment of the current competition and consumer laws, as contained in Part 2-3 of Schedule 2 of Competition and Consumer Act 2010 (Cth) (CCA). This law governs the unfair terms contained in standard form consumer and small business contracts.

However, the legal landscape is set to undergo a significant transformation, as amendments to the UCT law contained in the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Act) are slated to take effect on 9 November 2023. The Act amends the CCA and the Australian Securities and Investments Commission Act 2001.

Under the revamped legislation, the definition of ‘small business’ is expanded to apply to more small businesses. A small business, as per the new law, is identified as a business with 100 or fewer employees or an annual turnover of $10 million or less. This expanded definition marks a significant departure from the previous definition of small business, where the UCT law would only apply if two criteria were met: one party is a business with fewer than 20 employees and either the upfront price of the contract does not exceed $300,000 or contract is for a duration of more than 12 months and the upfront price payable under the contract does not exceed $1 million.

The crux of the UCT laws lies in their application. These laws come into play when a contract ticks three essential boxes: it involves at least one party who falls within the small business definition, the contract is considered as a standard form contract, and, crucially, it contains a term deemed unfair. The legislation expressly prohibits the use or reliance on any unfair contract term in consumer or small business contracts.

Penalties for non-compliance are stringent, reflecting the gravity of the matter. Individuals could face fines of up to $2.5 million, while companies may find themselves liable for a greater amount of $50 million or 3 times the value of the benefit (if the court can determine the value of the benefit) or 30% of the adjusted turnover during the breach turnover period (if the court cannot determine the value of the benefit), which is staggering as it is a penalty per each unfair term. These penalties are a significant escalation from the previous penalties structure, demonstrating the Australian government’s commitment to upholding consumer rights and fair business practices.

Furthermore, the legal system’s response to unfair terms has undergone a notable evolution. Courts are now vested with far-reaching powers, allowing them to not only void the unfair term but also to vary the entire contract or even refuse its enforcement altogether. This departure from the earlier practice signifies a more stringent approach to ensuring fairness and equity in contracts.

The legislation also empowers courts to impose penalties, award monetary compensation for losses or damages, and even issue orders preventing the inclusion of similar unfair terms in future contracts. This multifaceted approach underscores the government’s dedication to eradicating unfair practices comprehensively.

In addition to court interventions, the Australian Competition and Consumer Commission (ACCC) plays a crucial role in upholding the integrity of contracts. The ACCC can prevent unfair terms from surfacing in any contract, a proactive measure aimed at curbing unfair practices before they gain ground.

A pivotal element in the UCT law revolves around standard form contracts. These contracts, characterised by limited negotiation opportunities and a significant power differential between parties, are at the core of the legislation’s focus. Determining whether a contract falls under the ‘standard form’ category involves a careful evaluation and the definition has significantly broadened under the new UCT law. Courts will weigh several factors, including the balance of bargaining power, the party responsible for drafting the contract before any discussions, the freedom provided to the other party for negotiation, and the contract’s consideration of the other party’s specific characteristics or the transaction itself. The new legislation now provides that even contracts offering minor negotiation opportunities, selections from predefined options, or limited negotiation regarding other contract terms may still be classified as ‘standard form.’

The UCT reform and the new UCT law will have a wide application to every business section. However, construction industry and the franchising sector will likely find themselves under increased scrutiny, as construction contracts and franchise agreements would, in most cases, be considered as standard form contracts. Thus, all franchisors and all companies operating in the construction arena should undertake a careful review of contractual terms within their agreements to determine if they would be deemed as unfair under the new law.

Determining the fairness of a term is does require a consideration of numerous factors. A term is considered unfair if it significantly imbalances the rights and obligations of the parties under the contract, confers substantial advantages to one party, is not essential for protecting the benefiting party’s legitimate interests and inflicts financial harm or other detriments when relied upon.

To offer practical guidance, the law provides a list of examples of terms that may be classified as unfair. These include clauses related to automatic renewals, unilateral price increases, post-contract price setting, restrictions on business commentary (especially online) and indemnity clauses that penalise for losses that could be mitigated.

It is essential to note that the new Section 26(1) of Schedule 2 of CCA lists specific scenarios where the UCT law does not apply. These include terms mandated or allowed by other laws, those outlining upfront prices, terms defining the main subject matter of the contract, and those enshrined within company constitutions, remain exempt from the law’s purview. Additionally, commercial contracts governing the shipping of goods by sea fall outside the legislation’s scope.

In conclusion, the UCT law in Australia has embarked on a transformative journey, aiming to level the playing field and foster fairness in contractual agreements. The amendments, set to come into effect on 9 November 2023, herald a new era of consumer and small business protection and ethical business practices. We would urge all franchisors to review of their franchise agreements and obtain expert legal advice on potential unfair terms within these agreements without any delay.

See our downloadable summary of the changes below.

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