Unfair Contract Terms Regime Changes: Are you ready to advise clients?

On 9 November 2023, extensive changes to the UCT regime came into effect under the Australian Consumer Law (ACL) and the mirrored provisions in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

As practitioners would be aware, the ACL and ASIC Act have included an UCT regime for some time. While previously courts could declare specific terms of a standard form contract with consumers and small businesses unfair and therefore void, unfair terms were not prohibited, and courts could not impose penalties on business that included them. In practice the 'old' legislation did not encourage parties to draft 'fair' terms given the most likely outcome of an adverse finding against the offending party was the term being deemed void and unenforceable (and there was no penalty for being found in breach of a prohibition). If a practitioner advised clients to draft their terms to be 'fairer', they ran the risk of opening the client up to greater commercial risk 'unnecessarily', especially when assessed against the lack of penalty if a term was ultimately found unfair. Therefore, it was often considered that keeping the status quo standard terms was lower risk.

However, with the updated UCT regime, this risk landscape has now changed for clients and their practitioners. As well as making unfair contract terms illegal and introducing substantial penalties, courts can make flexible orders to prevent or reduce loss or damage that has been caused by, or is likely to be caused by, relying on an unfair contract term. The definition of a ‘small business’ contract has also changed to substantially increase the reach of these new provisions.

The amendments will apply to:

• consumer contracts and small business contracts which are 'standard form contracts' entered into on or after 9 November 2023
• existing consumer contracts and small business contracts which are 'standard form contracts' and that are renewed on or after 9 November 2023
• a term of an existing consumer contract or small business contract that is a 'standard form contract' that is varied on or after 9 November 2023. The new UCT regime only applies to the terms which are varied.

A consumer contract is a contract for the supply of goods or services, or a sale or grant of an interest in land, to an individual for wholly or predominantly personal, domestic or household use or consumption.

Under the ACL, a small business contract is a contract for the supply of goods and services, or sale or grant of an interest in land, where at least one party to the contract is a small business – that is a business that employs 100 or fewer people at the time the contract is signed or has a turnover for the last income year of less than $10 million, irrespective of the value of the contract. There is no longer a cap on the contract price under the ACL as was previously the case.

Under the ASIC Act, there is a cap on the upfront price payable under the contract of $5 million.

Typically, a standard form contract is a contract that is not subject to negotiation between the parties (eg: ‘take it or leave it’ terms). Whether a contract is in standard form will be a decision for the court which must take into account the matters listed in section 27 (2) of the ACL (including bargaining power, who prepared the contract, whether the terms were 'take it or leave it', whether there was an effective opportunity to negotiate and whether the terms took into account the 'specific characteristics of another party or particular transaction'), or where the contract is a financial product or for the supply of a financial product or service, section 12BK (2) of the ASIC Act.

The amendments to the UCT regime do not change what is considered an unfair contract term. However, it is important to be aware of the test applied by the courts when determining whether a term is unfair. Whether a term is 'unfair' in each case will be judged by the court taking into account matters it thinks relevant, but must take into account whether the term is transparent and the contract as a whole.

A term of a consumer contract or small business contract is considered unfair if it:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term
  or
• would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Certain terms are exempt from being unfair if they define the subject matter of the contract, set the upfront price or are required for inclusion by a law of the Commonwealth or a state or territory.

The ACL (section 25) and ASIC Act (section 12BH) set out a guide to the kind of terms that may be unfair (the 'Grey List'). Broadly these include terms which:

• allow one party (but not the other) to avoid or limit its obligations and responsibilities under the contract
• allow one party (but not the other) the right to vary, renew or terminate the contract
• allow one party to vary the upfront price payable under the contract without the other party having the right to terminate the contract
• penalise one party (but not the other) for breaches of contract or termination of the contract.

What is invalid in one contract, might be commercially justified in another (even in the same industry). The Grey List only serves as a guide for courts when assessing the fairness of a term, without establishing a presumption that such terms are inherently unfair. Generally, when considering whether a term from the Grey List is unfair, the courts will continue to evaluate each term based on the criteria for fairness as we describe above.

Fairness in this context is not a measure of the morality or conscionability of the term, contract or transaction.

From 9 November 2023, the (substantially higher) civil penalty regime under the ACL now applies to unfair contract terms.

The maximum penalties under the ACL and ASIC Act are set out in the table below.

Each unfair contract term included in a standard form consumer contract or small business contract may attract a separate penalty.

If a court finds that a term is unfair, it can also make a range of orders, including to:

• declare all of part of the contract to be void
• vary the contract or refuse to enforce some or all of the terms of the contract
• direct the business to refund money, return property or provide relevant services to the affected consumer or client
• prevent the same or a substantially similar term from being included in any future standard form small business or consumer contract.

The introduction of substantial penalties and additional remedies elevates the importance for practitioners to carefully evaluate whether the UCT regime is likely to apply to their client's standard form contract and if a deeper analysis is required.

Some examples of client contracts which may be affected by the UCT regime are set out below:

The expansion of contracts covered by the UCT regime and introduction of substantial penalties and flexible remedies for contraventions heightens the risk profile and potential for a clause in a client's standard form contract being contested by a counterparty. It also significantly increases the potential costs for clients arising from a clause being found to be an unfair contract term. It is a timely reminder for practitioners and their clients to identify and review any current standard form contracts now and undertake an analysis to amend or remove any unfair contract terms.

To assist clients manage and mitigate legal risk in respect of the updated UCT regime, practitioners should:

• Read the UCT provisions found at Part 2-3 of the ACL (made up of sections 23 to 28) (and the mirrored provisions in the ASIC Act) and get an understanding of the thresholds for:
  - what clients and contracts are caught by the UCT regime
  - what the thresholds are for unfair contract terms
  - what terms are exempt (as they define the main subject matter of the contract, set the upfront price payable or are required for inclusion by a law of the Commonwealth, or a state or territory).
• Inform clients of the effect of the updated UCT regime and that, regardless of their own size, the regime may still apply to their standard form contracts depending on the nature of their counterparty or customer.
• When providing contractual advice, always consider whether the contract is a ‘consumer contract’ or ‘small business contract’ in standard form under the ACL or ASIC Act.
• If the analysis is that the relevant contract is a consumer contract or small business contract in standard form then it should be reviewed on a line-by-line basis to assess whether each term could be considered 'unfair' or exempt at law. This analysis will often require an iterative process as it will involve advising on the updated regime, taking instructions and then exchanging advice and instructions until your client decides on which terms are unfair or not based on the relevant thresholds and the nature of the transaction which is the subject of the contract.
• Inform clients of the significant penalties that now apply and the ability of courts to make more flexible orders to prevent or reduce loss or damage, which now elevates the risk profile to their business.
• It is incumbent on practitioners to monitor and keep up to date with case law concerning the application of the updated UCT regime and the test for when a term is 'unfair'.
• The UCT regime is a complex area of law. If practitioners do not have the expertise to advise fully on unfair contract terms, they should refer clients as necessary for specialist advice from a practitioner experienced in the area.

This article has been prepared for LPLC by Morgan Lane of Colin, Biggers & Paisley.

Further reading:

ASIC UCT guidance materials.