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New unfair contract terms laws will flip the script!

Big changes are coming to the laws governing unfair contract terms in Australia. The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Cth) (the UCT Reform Bill), intended to amend unfair contract terms laws, has been passed and will come into effect 12 months after Royal Assent (which is expected imminently).

So what are the changes?

1.    Expansion of the unfair contract terms regime

The definition of “standard form” contract has been expanded by the clarification that a contract may still be considered “standard form”, and thus caught by the regime, even though there may have been:

(a)  an opportunity to negotiate minor or insubstantial changes;

(b)  an opportunity to select a term from a number of options; or

(c)   an opportunity for a party to another version of the same contract to negotiate the terms of that other contract.

Further, the definition of “small business contract”, to which the unfair contract terms regime applies, has been expanded. Currently, the definition requires that a party to the contract have fewer than 20 employees and the contract must be less than a threshold value. The new definition only requires that a party to the contract have fewer than 100 employees and a turnover for the last income year of less than $10m.

These changes will bring many businesses under the auspices of the regime for the first time. The days of “take it or leave it” could well be over for many. Enforcement will be key to giving the regime teeth.

2.    Increased penalties

Currently, there are no financial penalties for unfair contract terms! If a term is found by a court to be unfair, it will be deemed void and enforceable, and that will continue to be case under the soon-expanded regime.

Once the UCT Reform Bill takes effect, for companies, the maximum penalties will be the greater of:

(a)  $50 million;

(b)  if the court is able to calculate the value of the benefit obtained – then three times the value of the benefit; or

(c)   if the court is unable to calculate the value of the benefit – 30% of the adjusted turnover during the breach turnover period for the offence.

For individuals, the maximum penalty will increase to $2.5 million.

These are huge penalties, tailored to hurt.

3.    Separate prohibitions and penalties for unfair contract terms

The unfair contract terms regime will now prohibit:

(a)  making a contract with unfair contract terms; and

(b)  applying, relying or purporting to apply or rely on unfair contract terms.

Each unfair contract term in such a contract that is made or relied upon will constitute a separate prohibition and can attract a separate penalty.

Next steps

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The UCT Reform Bill will only apply to new contracts, entered into on or after the date being 12 months after the Bill receives Royal Assent (which is expected imminently), however the changes will also apply to existing contracts that are renewed or varied after that date. This 12-month period before the Bill comes into effect is intended to give businesses time to review and amend their relevant contracts in preparation for the changes.

If you would like to discuss having your standard form contracts reviewed for unfair contract terms, please get in touch.

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