National unfair contract terms (UCT) regime came into operation in 2010 which rendered void unfair terms in standard form consumer contracts.

Further reforms were introduced in November 2023 which made such UCT’s void, but also illegal. The Competition and Consumer Act 2010 and the ASIC Act 2001 contain significant penalties for using UCTs, with each term found to be unfair being a separate contravention.

The penalties for each contravention are significant and are as follows:

  • For companies, the greater of $50 million, 3 times the benefit obtained from the conduct, or 30% of the company’s adjusted turnover during the breach turnover period.
  • For individuals $2.5 million.

Essentially a term of a consumer contract or small business contract is void if it is unfair and contained in a standard form contract.

Let’s break this down.

Consumer Contract or Small Business Contract

For the prohibition to apply, the contract must either be a consumer contract or a small business contract.

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

Prior to 9 November 2023, only consumers could rely on the UCT when dealing with big businesses. However, from 9 November 2023, these protections are extended to small business contracts also. The UCT protections can be relied on by small businesses as long as the contract is for a supply of goods or service, or a sale or grant of an interest in land, and at least one of the parties to the contract satisfies either or both of the following conditions:

  • Businesses must employ fewer than 100 people; and/or
  • Have a turnover of less than $10 million for the previous income year.

Under the AOC Act, the UCT regime only applies to small business contracts if the upfront price payable is $5 million or less.

Term must be Unfair

Section 24 of Australian Consumer Law (ACL) sets out when a term of a consumer contract or a small business contract is unfair. It is unfair if:

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

It is important to make sure your contracts (Terms & Conditions, Supplier Contracts, etc) do not contain unfair terms which are heavily weighted in one person’s favour. Specifically, any terms which limit or exclude the liability of one party, provide for wide indemnities or automatic rollover, or give only one person the right to unilaterally vary or terminate the contract without reasonable cause.

Standard Form Contract

The final factor that must exist for the UCT provisions to apply is that the contract is a standard form contract. Section 27 of ACL provide a list of factors the court may consider, including whether or not one party was effectively ‘required to either accept or reject the terms of the contract … in the form in which they were presented’ and ‘whether another party was given an effective opportunity to negotiate the terms of the contract’.

Where a consumer alleges a contract is a standard form contract, according to section 27(1) of ACL, it will be presumed that it is unless the other party proves otherwise.

Businesses may consider the need to get a deal across the line more important than taking the time to consider and negotiate the paperwork, or not consider this an important step.

Particularly businesses who have dominant bargaining power and who use a standard template contract (standard form contract), or a set of Terms & Conditions, must take care to ensure that there are no unfair terms which may be found to be void, or even set the deal aside.

While this has been important for a long time, with the significant criminal penalties, it is vital now to ensure your contracts are not unfair and illegal!

Contact Rankin Business Lawyers for practical, on-point commercial legal guidance.

Stacey Brennan