Strengthened Unfair Contract Terms Regime Affects Contracts and Leases from November 2023
By: Nasiya Goldberg, Senior Associate
In December last year, the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) was passed, introducing changes to the Competition and Consumer Act 2010 (Cth) including the Australian Consumer Law (ACL). This includes strengthening the Unfair Contract Terms (UCT) regime and increasing maximum penalties for breaches of the ACL. The tighter UCT provisions are set to take effect on 10 November 2023. This article provides general comments regarding the implications of the regime changes, including in relation to commercial leases.
The UCT regime applies to standard form contracts with consumers or small businesses. Proposing, using or relying on ‘unfair contact terms’ in ‘standard form contracts’ is prohibited under the regime. The UCT regime changes broaden the purview of the categories of contracts captured under the regime and introduce significantly higher penalties for contraventions. A contract term is defined in the ACL as an ‘unfair contract term’ if it causes a significant imbalance in the rights and obligations of the parties under the contract, is not reasonably necessary or would cause financial or other harm if enforced.
Importantly, the UCT regime changes broaden the application of the regime as follows:
- there is no longer a contract value threshold, meaning the UCT regime will apply to all standard form contracts regardless of the contract value;
- the UCT regime will now apply to a significantly expanded class of ‘small businesses’. The definition of ‘small business’ now includes parties to contracts which employ fewer than 100 people (increased from 20) or has a turnover of <$10,000,000;
- A ‘standard form contract’ will include a contract prepared by the party holding all or most of the bargaining power, which is not subject to substantive negotiation by the other party. In addition to the existing factors, the regime changes clarify that a contract can still fall within the legislative definition of a ‘standard form contract’ despite:
- the other party having an opportunity to negotiate changes to terms of the contract that are minor or insubstantial in effect
- the other party being able to select a term from a range of options determined by the party that prepared the contract, or
- the party that prepared the contract engaging a third party to negotiate the terms of a different contract. This means that even if some consumers or small businesses are able to negotiate the terms of a contract that is issued to a broader group of consumers or small businesses, the contract may still be a standard form contract.
The regulators and courts have determined that the following types of contract terms may be considered ‘unfair’:
- broad discretions that allow one party to unilaterally vary contract terms (such as prices);
- termination or default rights that allow one party (but not both parties) to terminate the contract;
- limitations of liability that limit one party’s liability;
- broad indemnities that indemnify a party for costs and losses that are outside the other party’s reasonable control;
- automatic renewal terms giving the other party little or no notice of such renewal; and
- early termination charges that impose unreasonably high break fees.
The regime changes will apply to commercial leases, renewals, variations and extensions entered into or varied on and from 10 November 2023 (although it will not apply retrospectively). Many of the above contract terms are routinely included in commercial leases and retail leases, so both landlords and tenants should consider whether their leases will be caught under the expanded regime and whether any of the lease terms could constitute unfair contract terms.
The regime changes include the introduction of increased maximum penalties for contraventions of the ACL by individuals (now $2,500,000) and companies (to the greater of $50 million (previously $10 million); 3 times the value derived from the relevant breach of the ACL; or 30% (previously 10%) of the company’s turnover during the period it engaged in the relevant conduct). Importantly, there is no defence available to companies which mistakenly assume that the other party to a contract is beyond the purview of the UCT regime, leading some companies to take the conservative approach of classifying all counterparties as ‘small businesses’, even when they may not be.
- Time is of the essence for companies to prepare for changes to unfair contract terms regime. Companies should consider:
- Are your contracts or leases with small businesses caught by the expanded regime?
- Do your standard contracts or leases contain terms which are ‘unfair’?
- Landlords and tenants should take proactive steps to mitigate potential liability under the expanded unfair contract terms regime.
- You should seek advice now on managing the impacts of these reforms, especially prior to entering new leases, variations, extensions and renewals. Our property team is well-placed to assist you in reviewing your standard leasing documents to ensure compliance.
The MST Property and Leasing team remain available to assist you with your property and leasing queries. Please contact Nasiya Goldberg, Senior Associate on (03) 8540 0727 or Evelyn Marcou, Principal on (03) 8540 0243.