Unfair Contracts and Small Business: Your Rights and Responsibilities

Key Points

• Unfair Contract Terms (UCT) reforms took effect from 9 November 2023 and make UCTs illegal, attracting substantial penalties.
• The amendments broaden the scope of contracts that fall within the UCT regime.
• Businesses should review their standard form contracts to ensure they do not include any unfair terms.
• Consumers should be aware of their rights when they find themselves party to a standard contract with unfair terms.

Background

UCT law affects the rights and responsibilities of small businesses by providing them with legal protection against unfair terms in standard form contracts. Standard form contracts are those that are prepared by one party and offered to the other on a “take it or leave it” basis, with little to no opportunity for negotiation.

The law aims to address power imbalances between small businesses and larger, more established entities by prohibiting unfair terms that may be inserted by the stronger party to the detriment of the weaker party.

Who is Affected?

UCT law applies to contracts where at least one party is a small business. Under the new reforms, this is now defined as a business with fewer than 100 employees or annual turnover less than $10 million.

What are Unfair Contract Terms?

Under the law, a contract term is considered unfair if it:

1. causes a significant imbalance in the parties’ rights and obligations;
2. is not reasonably necessary to protect the legitimate interests of the party benefiting from the term; and
3. would cause detriment (financial or otherwise) to a party if relied upon.

Examples of UCTs include terms that allow one party to unilaterally vary the contract without the other party’s consent, terms that excessively limit one party’s liability, or terms that penalise one party for breaching or terminating the contract while allowing the other party to escape similar consequences. These include automatic renewal terms (where one party can renew the contract unless the other party gives notice to cancel).

Terms incorporated by reference (to, say, a stet of terms or a specific policy) are also considered unfair (and will be considered void) if they are not clearly linked and easy to find.

Consequences for Breach

If a contract term is found to be unfair, it will be considered void and unenforceable. However, the remainder of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

Substantial penalties now apply to any business that “proposes, applies, relies or purports to apply or rely on” a UCT. Importantly, this means exposure to penalties arises at the time an unfair contract term is offered to a customer, not just when the contract commences.

The recently increased maximum penalties available under the UCT regime include amounts up to $50 million or 3 times the value of the benefit obtained by the UTC.

Next Steps

The ACCC has flagged its intention to prioritise enforcement of the UCT legislation. If you haven’t already, you should carefully review your company’s standard contracts to consider any compliance risk. Equally, if you are a customer and you are presented with a standard contract that contains UCTs, you can seek to have the terms removed or have the contract referred to the ACCC. This includes contracts that may have been subject to minor negotiated changes.

How We Can Help

Our Corporate & Commercial team is available to assist with any questions you may have. Please email us your enquiry.