What’s changed?
Key changes
- The meaning of ‘small business’
UCT protections now apply to more small businesses.
Prior to the reforms, a small business was a business with fewer than 20 employees and a contract value up to $300,000 (or $1 million if the contract duration exceeded 12 months).
The reforms raise these thresholds and remove the contract value requirement. From 10 November 2023, a ‘small business’ is a business that either employs fewer than 100 people or has an annual turnover of less than $10 million.
These changes mean that more business will be classed as small businesses, eligible for protection against UCTs in business-to-business contracts.
- Counting employees
Businesses now count part-time employees as an appropriate fraction of a full-time employee. Prior to the reforms, the counting of employees followed a ‘head count only’ approach. This change will affect whether a business satisfies the employee threshold in determining whether it is a small business.
- Powers of the court
Prior to the reforms, standard form contracts that contained a UCT were automatically void.
Under the reformed UCT regime, a court can make additional orders to prevent loss. A court is empowered to:
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- consider whether a party has used the same or substantially similar contract in the past;
- make orders to void, vary or refuse to enforce a contract to prevent likely loss (meaning the court can consider not only whether the contract term has caused loss, but also whether it has the potential to cause loss);
- injunct a party from using a term that is the same or substantially similar to a term that has already been declared a UCT, from being used in future standard form contracts;
- make orders removing the same or substantially similar term from standard form contracts across the whole business; and
- injunct a party from applying or relying on a substantially similar term in any existing contract, even if the existing contract is not adduced before the court.
- Increased penalties
Penalties have been introduced for using or attempting to enforce unfair contract terms. This is a major change.
Historically, courts have only been able to set aside contracts that breached the UCT protections. With the reforms, penalties have changed significantly:
| For consumer and small business contracts: | For financial product or services:* |
The greater of up to:
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The greater of up to:
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What is an unfair contract term?
- causes a significant imbalance in the parties’ rights and obligations;
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by such a term; and
- would cause detriment to a party if the term were to be applied or relied on.
- unilateral variation clauses, allowing one party to vary the contract terms without notice or consent;
- termination clauses that permit one of the parties to terminate the contract without cause or reasonable notice;
- indemnities that are not reciprocal or proportionate to the risk of the party; and
- limitation of liability clauses that severely limit the liability of one party, while disproportionally placing commercial risk on the other party.
What this means for businesses?
- carefully review any existing agreements, looking for any terms that may be considered unfair or imbalanced from the counterparty’s perspective (place yourself in the shoes of the other party when reading the contract); and
- keep staff informed and involved in commercial negotiations so they are familiar with the new UCT regime.
- Standard form contracts – be cautious with standard form contracts, which you may commonly use when transacting with your customers, suppliers and other businesses. Make sure any existing standard form contracts are reviewed and updated regularly.
- Drafting – as a general practice commercial agreements should be clear. When drafting or amending agreements, try to avoid terms which may be vague or ambiguous.
- Balanced terms – where possible, consider carefully any terms that are heavily imbalanced and favour one party over the other.
For further consideration
- On 4 July 2024, the Federal Court of Australia declared that a term, permitting PayPal to retain fees it had erroneously charged unless the customer notified PayPal of the error within 60 days, was unfair and ordered that PayPal be restrained from applying, relying on or enforcing that term in its standard form contracts with small businesses.
- On May 2020, following investigations by the Australian Securities and Investments Commission, the Federal Court of Australia found several terms within six small business contracts used by Bendigo Bank and Adelaide Bank to be unfair, as the terms created an imbalance in the rights of the parties and were not being reasonably necessary to protect the interests of the banks.
- On 17 October 2017 following an application by the Australian Competition and Consumer Commission (ACCC), the Federal Court of Australia found eight terms, permitting JJ Richards & Sons to unilaterally increase prices and creating unreasonable indemnities in favour of JJ Richards & Sons, were unfair.
Takeaways
This article may provide CPD/CLE/CIP points through your relevant industry organisation.
The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
