Australia: Time to revisit your standard form contracts? Australia set to introduce heavy-hitting penalties for unfair contract terms

The UCT regime applies to standard form contracts with consumers and small businesses.

Under both the ACL and ASIC Act, a 'small business contract' is one where:

• one of the parties to the contract (even the party that prepared the contract) is a business employing fewer than 20 employees; and
• the upfront price payable under the contract is less than (i) $300,000; or (ii) $1 million if the contract is longer than 12 months.

The UCT regime will continue to apply to consumers and small businesses, however the 'small business' definition will change so that it is met if one party satisfies either or both of the following conditions:

• employs fewer than 100 employees; or
• has an annual turnover (based on its last income year) less than $10 million.

ASIC Act thresholds changed so that it is met if:

• the contract has an upfront price payable less than $5 million; and
• one party satisfies either or both of the following conditions (i) employs fewer than 100 employees or (ii) has an annual turnover (based on its last income year) of less than $10 million.

A wider range of standard form contracts will be caught by the UCT laws, including those made with businesses that would not generally considered 'small' (for example, businesses that employ up to 100 people).

Industries where high value contracts with small businesses are more common (e.g. those with an upfront price over $1 million) may find that standard form contracts that were previously not subject to the UCT laws are now caught by the new definition and therefore will need to be carefully reviewed and updated to achieve compliance.

When determining whether a contract is a standard form contract, the court must consider whether:

• one party was required to reject or accept the terms of a contract in the form it was presented; and
• another party was given an opportunity to negotiate the terms of the contract.

A contract may be determined to be a standard form contract despite there being an opportunity for a party to:

• negotiate minor or insubstantial changes;
• select a term from a range of options; and
• negotiate terms of another contract.

In addition, the court must consider whether a party has used the same or similar contract before.

The current UCT laws do not currently make any direct reference to 'negotiation'.

If passed, the changes would increase the risk of negotiated contracts being caught by the UCT laws. The extent of negotiations will now be a relevant factor that the court must consider, as is the extent to which the respondent has used the same or similar contract before.

Previous strategies that a business may have developed to avoid the UCT laws (such as allowing negotiation of select terms only) may no longer be effective.

Current position

Proposed change

Anticipated effects or risks

Where a court determines a term in a standard form contract to be unfair, it is automatically void.

A person is prohibited from proposing, applying or relying on (or purporting to apply or rely on) a UCT and penalties and new consequences will apply to contraventions (as explained below).

Each UCT contained in an affected contract would constitute a separate contravention, as would attempting to rely on the UCT. This means that multiple contraventions could arise from a single standard form contract, with each contravention attracting its own penalty.

The fact that penalties will now apply significantly increases the risk for parties. It will be critical for businesses that have previously undertaken a UCT review under the current UCT laws (without penalties) to revisit this work to determine whether different positions should be taken to account for the introduction of penalties.

No penalties currently apply for using UCTs – unfair terms are not prohibited but can be declared void by a court.

For a body corporate, the maximum penalty under the ACL would be the greater of:

• $50 million;
• three times the value of the benefit of the conduct; or
• 30% of the body corporate's adjusted turnover during the breach turnover period for the act or omission.

For a body corporate, the maximum penalty under the ASIC Act would be the greater of:

• 50,000 penalty units (currently $11.1 million);
• the amount of the benefit derived and detriment avoided because of the contravention multiplied by three; or
• 10% of the annual turnover of the body corporate for the 12-month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision, or if that amount is greater than an amount equal to 2,500,000 penalty units ($555 million), 2,500,000 penalty units.

There would also be significant penalties for individuals under both the ACL and ASIC Act.

These are significant increases to the maximum penalties. For the UCT regime, given the evaluative and somewhat uncertain process for determining whether a term is unfair, these are very significant maximum penalties.

The 'adjusted turnover' is a new concept and would be the total value of all of the supplies that the body corporate (and any related body corporate) has made, or is likely to have made, during the breach turnover period, with some limited exceptions. The 'breach turnover period' would be the duration of the breach, however 12 months is the minimum period over which the penalty is calculated.

Where a term is determined to be a UCT, and the person has suffered, or is likely to suffer, loss or damage, the court may make orders:

• declaring the whole or part of the contract void or void ab initio; and/or
• varying or refusing to enforce part or all of the contract.

However, such orders can only be made where a person or class of persons has suffered or is likely to suffer loss or damage.

In addition to the current powers, the court may make orders to:

• redress, in whole or in part, loss or damage that has been caused, or to prevent loss or damage that is likely to be caused;
• on application by the ACCC or ASIC (i) prevent a term that is the same or substantially similar to an unfair term from being included in future standard form small business or consumer contracts; or (ii) prevent or reduce loss or damage which is likely to be caused to any person by the unfair term.

The courts' expanded powers may see an increase in orders preventing a term that is the same or substantially similar in effect to a term that has been declared unfair from being used in parties' future standard form small business contracts.

The court may prohibit a party from applying or relying on (or purporting to apply or rely on) a term of a contract that has been declared unfair.

In addition to the current injunction powers, the court may order an injunction restraining a person from:

• entering into any future contract that contains a term that is the same or substantially similar to a UCT; or
• applying, or relying on, a term in any existing contract that is the same or substantially similar to a UCT, whether or not the contract is before the court.

Where a respondent is found to have used or relied on a UCT that is common across its other contracts, a court may make orders preventing the organisation from relying on those UCTs in its other contracts.

Litigation would therefore carry the risk that terms across a number of contracts will be found to be unfair (and deprived effect), even if those contacts were not subject to the proceedings.