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Important Changes to the Law for Small Businesses - Unfair Contract Terms

Updated: Nov 11

Changes to the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022.


Changes to the Unfair Contract Term (UCT) laws in Australia will start on 9 November 2023.


If you're a small business, you now only have a few weeks left to check your standard contract terms and update them to meet the new laws. The changes will apply from 9 November 2023 to standard form contracts used by small businesses that are created, renewed or have varied or newly added terms.


WHAT LAWS HAVE CHANGED?


The Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (Bill) was formally accepted on 9 November 2022. This was the catalyst for changes to the Australian Consumer Law. Businesses were given 12 months to get their contracts in order.


WANT TO READ THE LEGAL BITS?


Refer to Schedule 2 of the Competition and Consumer Act 2010 (Cth) (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).


All small businesses should review their standard form contracts to make sure they are not using UCT’s

SO, WHAT EXACTLY IS A UCT?


Think of UCT's as potentially unfair contract terms that could tilt the balance, aren’t really needed to protect interests or could cause harm to a party when enforced.


🚩UCT RED FLAG EXAMPLES 🚩


  • One-way street clauses: These give one party the right to terminate a contract, sidestep their obligations and vary their goods, services or prices without the other parties input.

  • Unilateral penalties: these are one-sided penalties for breaches.

  • Suing limitations: these limit one party’s right to sue the other.

  • Liability limitations: this is part of a contract that says one party isn’t responsible if something goes wrong.

  • Mismatched fix-it times: this could look like parties having different time frames to sort out mistakes.


WHAT ISN'T A UCT?


Before you panic, there are some terms that aren’t UCTs. These include:

  • Law required terms

  • Upfront price details

  • Subject matter definitions

  • Company constitutions

  • Commercial contracts for shipping of goods by sea.


SUMMARY OF UCT CHANGES


The Bill has made some important changes to strengthen the laws in Australia’s surrounding UCTs.


This aims to stop businesses from using unfair terms, which have become common practice in some industries.

Current Law

New Law

Penalties

Courts could decide UCTs could be cancelled, but there weren’t significant penalties.

People and businesses can now be fined for using or suggesting UCTs because it’s illegal to do so.


Individuals could be fined $2.5 million per breach, while companies could be fined $50 million or more, depending on the benefit they gained or sales because of the breach (whichever is higher).


These hefty fines are designed to deter businesses from just absorbing the penalties as a cost of doing business (because they’re able to afford it), instead of sticking to the rules.

Small Businesses

Applied to businesses with less than 20 employees, where the initial payments didn’t go over a certain limit.

Applies to businesses employing less than 100 people and with a turnover of less than $10 million.


This new definition of small business will now capture about 99% of Australian businesses.

Courts

UCTs were automatically considered invalid. The court could make decisions about some or all of the contract where someone was likely to suffer loss or damage.

Courts can now:

  • Make decisions to avoid loss or damage without having to prove that it has happened or will probably happen;

  • Say terms in an existing contract are unfair if they’re similar to a term that has already been identified as unfair by the court;

  • Use their power to stop a party from using UCTs in contracts; and

  • Decide not to enforce contracts, change them, or void them.

Standard Form Contracts

Courts would look at whether a party had the chance to negotiate terms, or if they had to accept or reject a contract as is.

Courts will now look at repeated use of the contract and the frequency.


Contracts might still be seen as standard even if:

  • The other party made small changes after minor negotiations

  • The other party picked from a range of options provided by the party who drafted the terms

  • A party given the same or a similar contract had the chance to negotiate terms.

Usually it’s assumed contracts are a standard form - now if they aren’t, you need to prove otherwise. If you’re using template agreements in your business, these will probably be considered the standard format.

WHAT HAPPENS IF I BREACH THE UCT LAWS?


In 2022, before the new UCT laws FujiFilm, had 38 contract terms labelled unfair by the Federal Court, after the Australian Competition and Consumer Commission (ACCC) commenced proceedings against them.


Each individual UCT term is treated as a separate breach so if Fuji Film had been subject to the new laws, the consequences could have been a lot worse for them.


Recently, the ACCC commenced proceedings against PayPal for UCTs in their standard form contracts. These proceedings are ongoing so watch this space.


As regulator, the ACCC might be gearing up to come down hard on UCTs once the new laws come into effect.


WHAT CAN I DO TO PREPARE?


All small businesses should review their standard form contracts to make sure they are not using UCTs.


Here are some tips:

  • Use clear and simple language

  • Be transparent and make sure essential terms are front and centre

  • Consider the impact of clauses for both parties

  • Counterbalance any terms in your favour, with a corresponding clause in favour of the other party

  • Be reasonable and specific

If you’re not sure, seek independent legal advice to avoid costly mistakes.


Our commercial lawyers are ready to answer any questions you have.


Call us on 13 55 29 for a confidential chat or contact us.


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