Unfair Contract Terms: Navigating New Penalties

From November 2023, the Australian unfair contract term (UCT) regime has been significantly strengthened, introducing substantial financial penalties for businesses that propose, apply, rely on, or vary unfair terms in standard-form contracts. This shift means a declared unfair term is no longer merely voidable; it can now attract significant pecuniary penalties, requiring all businesses using standard-form contracts to conduct a thorough review of their terms and conditions.

How do these changes impact B2B contracts?

The most significant impact of the 2023 reforms is on business-to-business standard-form contracts. The expanded definition of 'small business contract' captures a far greater number of commercial arrangements.

Businesses accustomed to robust, one-sided terms in their B2B agreements must now reassess these for compliance. Suppliers dealing with smaller businesses (under 100 employees or $10 million turnover) are particularly exposed. Reliance on historical contract templates without review is a substantial risk.

The penalties provide a powerful incentive for businesses to ensure their standard business contracts are balanced and fair. This includes terms used in service agreements, supply contracts, and online terms and conditions.

What should businesses do to ensure compliance?

Proactive review and amendment of standard-form contracts are critical. Waiting for regulatory action is not a viable strategy given the severity of the penalties.

Practical Steps for Compliance:

• Identify All Standard-Form Contracts: Catalogue every contract used with consumers or businesses under the new small business threshold (100 employees or $10 million turnover). This includes online terms, customer agreements, supplier agreements, and partner contracts.
• Review and Audit Existing Terms: Systematically assess each term against the three-part unfairness test. Pay close attention to clauses that grant one party excessive power, limit liability unfairly, or impose disproportionate obligations.
• Amend or Remove Unfair Terms: Redraft any terms identified as potentially unfair. The goal should be balance, transparency, and a legitimate commercial justification for any imbalance. Consider whether a term is 'reasonably necessary' to protect your legitimate interests.
• Implement Contract Governance: Establish clear internal processes for the creation, review, and approval of all standard-form contracts. Ensure legal review is a mandatory step before deployment.
• Train Staff: Educate relevant staff, particularly sales, procurement, and legal teams, on the implications of the UCT regime and the importance of using compliant contracts.
• Document Justifications: For any terms that might appear to be one-sided but are considered reasonably necessary, document the legitimate commercial reasons for their inclusion.

Businesses should review not only their outward-facing customer contracts but also their inward-facing supplier contracts to ensure they are not inadvertently imposing unfair terms on smaller suppliers.

What happens if an unfair term is found?

If a court or other relevant body (such as the ACCC) determines that a term in a standard-form contract is unfair, several consequences can arise:

• The term is void: The unfair term will be treated as if it never existed and cannot be enforced. The remainder of the contract will continue to bind the parties, provided it is capable of operating without the unfair term.
• Pecuniary penalties: As outlined, significant financial penalties can be imposed on the business that proposed, applied, relied on, or varied the unfair term.
• Injunctions: Courts can issue injunctions preventing a business from including or relying on an unfair term in future contracts.
• Adverse publicity: Regulatory action and penalties often result in negative publicity, damaging a business's reputation and consumer trust.

It is important to note that the onus is on the business seeking to rely on a term to prove that it is reasonably necessary to protect its legitimate interests.

Frequently asked questions

Can I still use exclusion of liability clauses in standard-form contracts?

Yes, exclusion of liability clauses can still be used, but they must be fair. They cannot be overly broad or exclude liability for matters that are reasonably within the party's control or responsibility. The term must be transparent and not create a significant imbalance or cause detriment without legitimate justification.

Do I need to review contracts already in place before November 2023?

The penalties apply to contracts entered into or renewed on or after 9 November 2023, or terms varied on or after that date. However, regulators can still declare unfair terms in older contracts void. It is prudent to review all standard-form contracts regardless of their start date to mitigate future risk.

What if I operate online and have terms and conditions?

Online terms and conditions are typically considered standard-form contracts. All website terms, app terms, and online purchase conditions must comply with the strengthened unfair contract term regime. It is critical to ensure these digital contracts are fair, transparent, and do not contain terms that could attract penalties.

Are bespoke, negotiated contracts exempt from these rules?

Generally, if a contract is genuinely negotiated and not standard-form, the unfair contract term provisions do not apply. However, care must be taken to ensure that what is presented as 'negotiated' is not merely a standard-form contract with minor, non-substantive changes, as the UCT regime could still apply.