We have heard a lot about changes to unfair contract terms in the last couple of years.

The ‘unfair contract terms’ laws (as set out in the Australian Consumer Law (ACL) establish out a regime whereby a term in a consumer or small business contract will be void if the term is unfair and the contract is a standard form contract.

Australia’s Unfair Contract Terms regime (UCT) has now been significantly expanded in respect of ‘small businesses’. The changes were passed by Parliament on 28 October 2022 and will come into effect on 9 November 2023.

The changes are monumental in terms of the penalties and scope of what is considered an “unfair” term. This will have significant impacts on many businesses – both in terms of the time it will take to review and amend contracts but also the consequences for not doing so.

What is a standard form contract?

A standard form contract is a contract which has been prepared by one party (Proposer) to an agreement and is presented to the other party (Other Party) on a “take it or leave it” basis with that party having limited or little opportunity to negotiate or alter the terms.

To determine whether a contract is a standard form contract, a court will consider all relevant matters including:

• Does the Proposer have all or most of the bargaining power?
• Did the Proposer prepare the contract, prior to any discussion relating to the particular transaction?
• Was the Other Party required to either accept or reject the terms, in their proposed form?
• Was the Other Party given an opportunity to negotiate the terms?
• Do the terms of the contract consider the specific circumstances of the parties and the transaction?

What is an unfair term?

For a term to be “unfair” it must:

• Cause a significant imbalance in the parties’ rights and obligations.
• Not be reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
• Cause a financial or other detriment (such as delay) to a small business if it were relied on.
• In deciding whether a term is unfair, a court will consider how transparent the term is, as well as the overall rights and obligations of each party under the contract.

A term will be transparent if it is:

• In plain language;
• Legible;
• Presented clearly; and
• Readily available to any part affected by the term

The following types of provisions in small business loan contracts are likely to be unfair:

• Entire agreement clauses;
• Broad indemnification clauses that do not exclude losses and liabilities arising from the fraud, negligence or wilful misconduct of the lender or its officers, employees, contractors, agents or receivers;
• Material adverse change default clauses and broad cross-default clauses;
• Non-monetary defaults that do not provide a reasonable remedy period or adopt a materiality threshold; and
• Broad unilateral variation clauses, including those that do not provide sufficient prior notice of the variations (particularly where the customer does not have a right to terminate without penalty).

Who does it apply to?

Presently under the ACL, the UCT regime applies to a small business where:

• At least one party to the contract employs fewer than 20 persons; and
• The upfront price payable under the contract does not exceed $300,000, or $1 million if the contract is for more than 12 months.

This will now be expanded to:

• At least one party to the contract employs fewer than 100 persons; and
• The small business has an annual turnover of less than $10,000,000

In the case of a consumer contract, the UCT regime applies to contracts for sale or supply to an individual whose interest is predominantly for personal, domestic or household use/consumption.

What has changed?

The key changes brought in by the amendments to the Competition and Consumer Act 2010 (Cth) (CCA) are:

• Wider scope of application – the UCT laws apply to significantly more businesses and transactions;
• Wider scope of consequences resulting from a breach – the courts have been given significantly more broad and far-reaching powers; and
• Higher penalties – a five-fold increase