By Irene Kim and Gavin Parsons

Business compliance is set to become stricter with higher penalties. On 10 November 2023, new laws will commence allowing the Federal Court to impose maximum penalties relating to unfair contract terms (UCTs). This new amendment, which expands the existing UCTs regime, aims to protect small businesses by widening the regime’s reach and increasing the penalties so that business do not exploit imbalanced bargaining power.

What are the new changes?

Currently the UCTs regime is contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth). However, it is expanding and the following are the key amendments:

• The new regime will apply to contracts involving businesses with less than 100 employees OR with a turnover for less than $10 million.
• The new regime can capture various types of contracts including consumer contracts, sale/lease of property, supply of goods and services, contracts with sub-contractors, retail leases and terms of trade.

What makes a contract term ‘unfair’?

In general, UCTs cause significant imbalances in the rights and obligations of parties, are not reasonably necessary to protect the interests of the party who would be advantaged by such a term, and would cause detriment to the other party if the term were applied or relied on.

Key examples of UCTs are:

1. Automatic renewal– terms that lets the business renew the contract, unless customers cancelled within a specified time period (days/weeks/months).
2. Disproportionate termination – terms which enable a business to terminate the contract in a much wider range of circumstances without notice to the consumer.
3. Limitation of liability and indemnity – terms which limit the business’ liability or requires the customer to indemnify the business without corresponding rights for the customer.
4. Termination fees – terms which requires customers to pay extensive exit fees, including charges which the business could set unilaterally.
5. Payment before delivery – requires customers to pay the business for goods or services under the contract irrespective of whether the business had delivered the good or service, and requires customers to pay the price for the good or service before delivery.

What are the Consequences?

As our previous article explained, the court has the power to declare UCTs void and unenforceable. The new regime further empowers this authority, also allowing the courts to issue injunctions.

Additionally, the new regime will allow for significant financial penalties to be ordered against businesses that seek to impose UCTs on customers. These include:

Our Recommendations for Businesses

The new amendments will be applied to contracts made on or after 9 November 2023, and to any existing contracts that have been reviewed on or after 9 November 2023. Given the serious consequences, businesses should minimise the risk of incorporating UCTs into contracts. The team at Gavin Parsons and Associates highly advise our clients to proactively review relevant contracts and make changes if necessary. Additionally, businesses can do the following to refrain from and/or minimise the incorporating of UCTs:

• Ensure terms are transparent, presented clearly and simply to any parties affected;
• Ensure the parties’ rights and obligations are balanced, and justify how any UCTs are reasonably necessary to protect the interests of the business seeking to enforce them;
• Carefully and precisely draft agreements and allow parties to negotiate so that potential UCTs can be removed from the contract easily without affecting the entire contract;
• Test whether conduct and contractual terms align to industry standards and codes; and
• Review sales approaches and tactics, whether contractual arrangements and risks taken on by the other party are adequately explained to customers during the sales process, and whether the use of commissions or incentives for sales staff is appropriate.

If you require further information and assistance in understanding and/or complying with your new legal obligations as business owners, please contact Gavin Parsons or the team at Gavin Parsons and Associates on (02) 9262 4471 or at gavin@gpalaw.com.au.

Disclaimer

The content of this paper is a general guide only, and should not be relied on as legal advice. Precautions have been taken to ensure that the information is accurate as at the time of publication, however, Gavin Parsons and Associates does not guarantee, and accepts no legal liability whatsoever arising from or in connection with, the accuracy, reliability, currency or completeness of any material contained in this paper.

This paper is not to be used as a substitute source of legal advice. If you would like to ensure whether your contract has any UCTs, we would strongly recommend obtaining appropriate legal advice relevant to your particular circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.