On 9 November 2023, significant changes were implemented to the Unfair Contract Terms (UCT) regime under the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Notably, these changes mean that significantly more contracts are now subject to the UCT regime and requirements, and penalties have been introduced for corporations that are found to be non-compliant.
Determining Applicability of the Expanded Scope: Standard Form Contracts
The expanded scope of the UCT regime applies specifically to standard form contracts with small businesses. Under the new regime, standard form contracts are determined by whether the terms and conditions are set by one party with limited room for negotiation. Further factors include repeated usage of a contract, inability to negotiate minor changes, and the use of pre-determined options determine their status.
Previously, small businesses were defined as having fewer than twenty (20) employees. With the introduction of the amendments, small businesses are now defined as having fewer than 100 employees or an annual turnover of less than $10 million. The impact of this is that there is now a significant number of transactions that fall within the scope of the UCT regime.
For financial contracts that fall under the ASIC Act, the financial threshold has also changed. The threshold was previously based upon the upfront price payable under the contract of less than $300,000, or, for a contract term in excess of twelve (12) months, less than $1,000,000. However, under the new regime the financial threshold is less than $5,000,000, again catching potentially significantly more transactions in its scope.
Potential Consequences of the Changes
The expanded UCT regime introduces a range of potential consequences for unfair contract terms. Unfair contract terms are now considered illegal, and contraventions can result in civil penalties. Courts have enhanced authority to vary terms found unfair, making it easier to rectify imbalanced agreements. Additionally, parties may seek other remedies, such as injunctive relief, to restrain the inclusion, application, or reliance on terms in future contracts that are the same or similar to terms declared unfair. For advisors reviewing contracts, the scope of the new UCT regime means that a significant number of current and new contracts may potentially require careful consideration of the UCT provisions to ensure the parties duly consider their responsibilities and are compliant with the requirements.
When a Term Is Considered a UCT:
Section 12BG of the ASIC Act provides guidance on assessing whether a term is an UCT, and sets out a the following factors for consideration:
Significant Imbalance: The term should be examined to determine whether it causes a significant imbalance in the parties' rights and obligations arising from the contract. In essence, the test evaluates whether the term unfairly favours one party over the other, resulting in a lopsided agreement.
Not Reasonably Necessary: The term is tested for whether it is reasonably necessary to protect the legitimate interests of the party that benefits from it.
Detriment: The test considers whether the application or reliance on the term would cause financial or other detriment to a party. If enforcing the term would result in harm or loss to one party, it may be considered unfair.
Section 12BH of the ASIC Act provides several examples that should be considered when applying this test.
NOTABLE CASES
Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd
In Australian Competition and Consumer Commission v Fujifilm Business Innovation Australia Pty Ltd [2022] FCA 928, the Court emphasized that terms allowing one party to unilaterally vary the contract during its term without the consent of the other party may be deemed unfair. Particularly, when there is no corresponding right for the affected party to consent to or reject the changes or to exit the contract. If the variation right is not reasonably necessary to protect the legitimate interests of the party seeking to exercise that right, it may be considered unfair.
ASIC v Bank of Queensland Limited
In ASIC v Bank of Queensland Limited [2021] FCA 957, the Bank of Queensland's standard form lending contracts for small businesses came under scrutiny.
The contracts considered in this matter included clauses that allowed the bank to unilaterally determine whether an event of default had occurred. They did not permit the customer to rectify a default capable of remedy, and they created defaults based on events that might or might not involve any material change in credit risk.
The Federal Court deemed these clauses, along with others, as unfair.
If you have any questions regarding unfair contract terms, do not hesitate to contact our team of specialist commercial lawyers at Jenkins Legal & Advisory.
This article is not legal advice, and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.