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Unfair Contract Terms (UCTs) – Australian Businesses on Notice

Australian business owners are now on notice, following significant changes to the Unfair Contract Terms (UCT) regime under the Australian Consumer Law, effective from 9 November 2023. The changes are aimed at protecting Australian businesses and consumers, and ensuring standard form contracts are fair to all parties. This legislation brings with it substantial penalties, so it is critical that business owners are aware of the changes and update their contracts as required.

What are the Changes?

The revised UCT regime casts a wide net, encompassing all industry sectors and affecting a vast array of Australian businesses. At its core, the regime applies to standard form contracts, specifically targeting small business contracts and consumer contracts. Small business contracts are those involving entities with fewer than 20 employees and involve an upfront price payable of less than $300K for contracts under 12 months or less than $1M for longer terms. Consumer contracts pertain to the supply of goods or services (or sale or grant of an interest in land) primarily for personal, domestic, or household use.

Prior to the new legislation, UCTs were void and unenforceable, but didn’t attract penalties as such. Now, however, they are now outright prohibited, with substantial penalties for inclusion in contracts or reliance upon them. Another key change here is the expansion in the scope of contracts subject to UCT rules, now including agreements with businesses not previously classified as ‘small’.

What Penalties Apply for UCTs?

The penalties introduced are daunting, particularly for corporations, which could face fines up to:

1. $50 million,
2. Three times the value of the benefit derived from the conduct, or
3. 30% of the entity’s adjusted turnover during the breach period.

Individuals, such as directors and managers, are not exempt, with penalties reaching up to $2.5 million for involvement in contraventions. This penalty in particular highlights the severity of the situation, and the importance of ensuring everything is above board in your business’ contracts.

Examples of UCTs

Businesses must be vigilant of terms within their standard form contracts that could be deemed unfair. Examples include:

• • Automatic contract renewal without notice,
  • Unilateral termination rights,

• One-sided limitations of liability or indemnity terms,
• Terms allowing unilateral variations,
• The right to unilaterally vary fees,
• Charges without supplier performance.

Such terms necessitate immediate review and amendment to mitigate the risk of being classified as UCTs.

What All Business Owners Must Do Now

To navigate these legislative changes successfully, business owners must identify and review all standard form contracts to determine if they fall within the “consumer contracts” or “small business contracts” categories. From there, they should be assessed for any unfair terms. If any are found, they must be amended to align with the new regulations.

With these changes in effect, Australian businesses are on notice. Identifying and rectifying any unfair contract terms (UCTs) and ensuring your contracts are compliant is not just about adhering to the law; it’s about protecting your business from potentially severe penalties. Act now to review your contracts and make the necessary adjustments. If you’re in any doubt as to the compliance of your contracts, we recommend seeking legal advice.

Further reading: The ASIC website has a summary of the changes and other relevant links here.

written by:

Nigel Plowman

Prior to forming McKinley Plowman, Nigel specialised in management consulting and international accounting, enjoying success in Australia and in the United Kingdom. His extensive experience in management consulting, international accounting and innovative tax structures has been a major driver in the success of McKinley Plowman as well as the many businesses he has steered towards new levels. Nigel is dedicated to fast-tracking his client goals with cutting edge tax and business strategies. He is a member of the CPAs and the Taxation Institute of Australia and enjoys developing tax strategies that work well here and around the world.