Unfair contract terms (UCT) refer to provisions in a contract that create a significant imbalance between the rights and obligations of the parties, to the detriment of one party. These terms are often found in standard form contracts where one party, usually the larger or more powerful one, dictates the terms without allowing the other party to negotiate or make changes.
In Australia, UCTs are governed by the Australian Consumer Law (ACL), which is a part of the Competition and Consumer Act 2010. The ACL applies to businesses that supply goods or services to consumers.
Under the current UCT regime, if a contract is deemed to contain unfair terms, those terms will be considered void and unenforceable by the court. The rest of the contract, however, will continue to bind the parties if it is capable of operating without the unfair terms.
In determining if a contract term is unfair, the following factors are considered:
Does the term causes a significant imbalance between the parties' rights and obligations.
Is the term reasonably necessary to protect the legitimate interests of the party advantaged by the term.
Would the term cause detriment (financial or otherwise) to a party if it were applied or relied upon.
Changes to the UCT regime will come into effect nationally from 10 November 2023. These changes are significant, and this date looms large for businesses who must be prepared and aware of the large penalties. The key changes include:
UCTs are illegal and attract penalties. Proposing, applying, and relying upon UCTs may attract significant monetary penalties imposed by the courts. Each UCT in a contract is an individual contravention. Previously, UCTs were merely void and unenforceable.
Further detail on ‘standard form contracts’. In addition to the existing factors courts may take into consideration when determining if a contract is a ‘standard form contract’, courts must also consider whether the party that prepared the contract has used the same or similar contracts before.
Expanded definition of ‘small business’. The UCT regime applies to ‘standard form contracts’ with ‘small businesses’. A ‘small business’ now means a business with 100 employees or less (this has been increased from 20 employees), or a business with an annual turnover of less than $10 million in the previous income year. The expansion of the definition means that more businesses will be protected by the UCT regime.
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