Businesses that employ fewer than 100 employees or with annual turnover under $10 million (Small Business) are now protected by the new unfair contract terms (UCT) regime in standard form contracts.
The intention of this new UCT regime is to capture an expanded number of businesses and provide greater protections to those businesses than the outgoing regime.
What is the Scope of the New UCT Regime?
Larger Scope to Protect Small Businesses
The outgoing UCT regime only applied to:
- businesses with 20 or fewer employees; and
- contracts with an upfront price under $300,000; or
- $1 million for contracts with a term longer than a year.
The new UCT regime applies to:
- Small Businesses with fewer than 100 employees; or
- has a turnover under $10 million; and
- sign standard form contracts for products, services or land transactions after 9 November 2023 regardless of the contract value.
What is an UCT?
A term of a standard form contract is unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
This is a technical area of the law and whether a term is unfair or not may depend on your business’ circumstances. You should have an experienced lawyer review your standard form contracts to ensure that they comply.
What is a standard form contract?
A ‘standard form’ contract:
- is prepared by one party;
- contains a set of generic terms and conditions;
- is usually not negotiated between parties; and
- is presented on a ‘take it or leave it’ basis.
There are five considerations a court takes into account to determine whether a contract is a standard form contract, being:
- whether one of the parties has all or most of the bargaining power;
- whether the contract was prepared by one party before any discussions took place;
- whether another party was effectively required either to accept or reject the terms of the contract as presented;
- whether another party was given an effective opportunity to negotiate the terms of the contract; and
- whether the terms of the contract take into account the specific characteristics of the other party or the particular transaction.
However, these considerations are not prescriptive. This prevents companies from structuring their contracts to fall outside any prescriptive definition.
Consequences of UCTs in Standard Form Contracts
If the court determines that a contract term in a standard form contract is unfair, the unfair term is unenforceable. However, this does not necessarily void the balance of the contract should the remaining terms be considered fair and equitable.
Other orders a court may make include, but are not limited to:
- declaring all or part of the contract to be void;
- varying or refusing to enforce part, or all, of a contract containing UCTs; and
- restraining the party from acting upon an UCT in existing and future contracts by way of an injunction.
Large Penalties Apply
The court may also impose penalties on parties who prepare standard form contracts containing UCTs.
The maximum financial penalty that may be imposed on a company is the greater of:
- three times the value of the “reasonably attributable” benefit obtained from the conduct, if the court can determine this; and
- if a court cannot determine the benefit, 30 per cent of adjusted turnover during the breach period.
The maximum penalty for an individual is $2.5 million.
What Do I Need to Do?
You should immediately review any standard form contracts you routinely use or have entered into. If you have any concerns about whether you may be impacted by the new UCT regime, you should seek legal advice immediately.
If you would like to discuss this article with us further or if you need a standard form contract reviewed, please contact David Greenberg, Partner, Thomas Zilm, Partner or Charlene Cai, Associate on (02) 9261 5900.