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26 January 202411 minute read

Regulating not-so-“small businesses”: Recent reform widens the scope of Australia's Unfair Contract Terms regime

On 9 November 2023, Schedule 2 of the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Act) entered into force. Relevantly, the Act amends the Unfair Contract Terms (UCT) regime within the Australian Consumer Law (ACL).

The Act has dramatically expanded the scope of the regulatory net cast by the UCT regime, with the consequence that businesses which have historically been insulated from the regime may now be subject to its operation.

In addition, the Act dramatically increases the penalties housed within the ACL and relevantly expands their application to contraventions of the UCT regime.

From 9 November 2023, businesses previously beyond the purview of the consumer and small-business oriented regulations may find themselves exposed to new regulatory risks and significant penalties if they do not amend their contracts to comply with the Act.

 

The reform

The UCT regime prohibits contractual parties from proposing or enforcing unfair contract terms. Generally, a term is unfair within the meaning of the UCT regime if:

  • it causes a significant imbalance in the rights and obligations of the parties to the contract;
  • it is not reasonably necessary to protect the legitimate interests of the party proposing or relying upon the term; and
  • the term would cause detriment (financial or otherwise) if applied or relied upon.

The UCT regime identifies contractual terms which are standard inclusions in Australian commercial contracts as examples of terms having the potential to be unfair. While each clause must be considered within the context of the contract in which it appears, these examples include:

  • unilateral rights of termination;
  • limitations on the ability of one party to sue the other; and
  • terms penalising one party, but not the other, for a breach or termination of a contract.

The Act amends several elements of the UCT regime, most notably its scope and the penalties applicable for contravention of its regulations.

 

Increased scope of application

The scope of application for the prohibition on unfair contract terms is limited in two respects:

  • firstly, the prohibition applies only to contracts that are consumer contracts or small business contracts within the meanings prescribed for those terms by the ACL; and
  • secondly, the prohibition applies only to standard form contracts (ACL s23).

Historically, the first limitation restricted the UCT regime to contracts dealing with consumers directly, and to contracts with small businesses’(i.e. businesses employing fewer than 20 persons) and having an upfront price of less than AUD300,000, or less than AUD1 million if the contract had a duration of more than 12 months.

Large companies have until recently been insulated from the effects of this legislation as they often exceeded these headcount and upfront price thresholds.

The Act amends the definition of small business contract in several ways:

  • the headcount threshold was raised from 20 persons to 100 persons;
  • the previous upfront price thresholds were replaced with a turnover threshold, including businesses with an annual turnover of less than AUD10 million for the previous income year; and
  • the thresholds were amended such that satisfaction of not both but either threshold would be sufficient for a contract to be considered a small business contract.

A comparison of the applicable thresholds for small business contracts is as follows:

Before 9 November 2023 From 9 November 2023
Headcount threshold Fewer than 20 employees Fewer than 100 employees
Upfront price threshold Less than AUD300,000 or less than AUD1 million if contract duration is greater than 12 months N/A
Turnover threshold (annual) N/A Less than AUD10 million

 

The reform also prescribes additional matters which must be considered when assessing whether a contract is a standard form contract. The UCT regime requires analysis of a range of factors including the balance of bargaining power between parties, historical use of contracts and whether both parties had an effective opportunity to negotiate the contract, among other considerations (ACL s27).

The Act introduces a new requirement that when determining whether a contract is a standard form contract, a Court must consider whether one of the parties has made another contract which was on the same or similar terms and prepared by that party, and, if so, how many such contracts that party has made. Additionally, further clarification has been introduced so that a contract may be a standard form contract despite:

  • an opportunity for a party to negotiate changes to the terms of a contract if those changes are minor or insubstantial in effect;
  • an opportunity for a party to select from a range of options determined by another party; or
  • an opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

 

Significantly increased penalties

The Act also reformed the ACL’s penalty regime, including by expanding the consequences for breach of the UCT regime. Previously if a term was found to be unfair the offending term was ruled to be void. Now, an additional pecuniary penalty applies for each unfair term proposed by a person, or each unfair term which a person proposes or relies upon (or attempts to propose or rely upon).

The maximum pecuniary penalties for relevant contraventions of the ACL by a body corporate, including contravention of the UCT regime, is the greater of the following:

  • AUD50 million (up from AUD10 million);
  • three times the value of the benefit derived from the contravening act(s), if the value can be determined; and
  • if the court is unable to determine that value, 30% of the offending party’s adjusted turnover during the 12 months preceding the contravening act (up from 10%).

The reform applies to all contracts entered into, renewed or novated, and to any terms of existing contracts which are amended, after 9 November 2023. This means that contracts entered into before the reform came into force can still be caught by it if they are amended or novated.

 

Key risks

Businesses with a large volume of standard form contracts should address the risk of key terms being found void and/or the risk of penalties in respect of each contravening term.

The reformed UCT regime has yet to be applied or tested in court and certain aspects remain unclear. For example, how will the headcount and turnover thresholds interact with corporate groups? In its current form, the ACL appears to extend the operation of the UCT regime to businesses which, by virtue of being subsidiaries or special purpose vehicles, may satisfy either or both thresholds despite forming part of a corporate group well in excess of either or both thresholds.

The headcount and turnover thresholds pose practical difficulties. Businesses which expect to avoid the UCT regime by reason that their dealings do not involve small businesses will need to be vigilant in their due diligence to ensure that current and future counterparties do not come to fall within either threshold. Difficulty in accessing the information necessary to conduct this due diligence is likely to frustrate this process.

The reform is important for construction and procurement businesses.

 

Small business contracts
  • While large-scale project contracts may be less likely to fall within the ambit of the UCT regime, smaller-scale commercial dealings with subcontractors and suppliers may require businesses to engage with smaller counterparties apt to fall within the headcount and/or turnover thresholds.
  • Similarly, onerous terms in a head contract may be valid if both parties to that contract exceed the headcount and turnover thresholds, however it may not be possible to back-to-back those terms with smaller subcontractors whose subcontracts may be subject to the UCT regime.

 

Standard form contracts
  • Industry standard contracts, such as the Australian Standard – General conditions of contract for construction, are likely to be considered a standard form contract if not meaningfully varied by the parties to such a contract.
  • Restrictive tender processes that do not permit meaningful negotiation may render a contract a standard form contract.

Businesses with contracts prepared in, and for primary use in, other jurisdictions should be especially wary as contractual terms which are permitted in other jurisdictions may nonetheless be considered unfair in Australia.

 

Implications

The UCT regime is no longer applicable only to businesses that deal directly with consumers, nor a regime that governs only the traditional conception of small business.

Enforcement of the UCT regime as it applies to small business contracts is one of the ACCC’s 2023-2024 enforcement priorities. Furthermore, the ACCC (Australian Consumer and Competition Commission) has demonstrated a willingness to pursue significant penalties in recent months. While in respect of another of the ACL’s general protections, the ACCC announced in July of 2023 that a record AUD438 million in penalties had been imposed by the Federal Court of Australia in enforcements proceedings it had brought.

Businesses should promptly review their contracts and bring them into compliance with the reformed UCT regime.

The question of whether a term of a given contract is unfair concerns a complex and evolving area of law. Businesses should seek legal advice to satisfy themselves that their standard form contracts are adequately de-risked.

 

Key takeaways

The scope of the ACL’s unfair contract terms regime has dramatically increased in respect of contracting between businesses. Any contract with a business employing fewer than 100 employees or having an annual turnover of less than AUD10 million could now be subject to additional regulation under the unfair contract terms regime.

This increase in scope has been paired with new and increased penalties. New pecuniary penalties apply in respect of breaches of the ACL, including the unfair contract terms regime, with penalty caps starting at AUD50 million per contravention.

This reform will affect many industries and sectors but is particularly relevant for construction and procurement businesses, especially those utilising standard form contracts prepared in jurisdictions other than Australia. Small-scale contracting with subcontractors and suppliers, as well as the common practice of back-to-back contracting may become key pain points.

Businesses should be proactive in bringing their contracts into compliance with the unfair contract terms regime.