(Un)fair Contract Terms

Using standard form contracts prevents the need to redraft a new contract every time a transaction occurs, saving both time and cost. But, where unequal bargaining power exists, a standard form contract could include terms which disproportionately benefit the party with greater bargaining power.

Under contract law, those agreements are legal although they might be unfair. Consequently, unfair contract terms (‘UCT’) legislation was introduced into the Australian Consumer Law in 2016 to protect small businesses and individuals from potential detriment when relying on standard form contracts.

What is unfair?

A term is unfair where it would cause a significant imbalance in the parties’ rights and obligations, is not reasonably necessary to protect the legitimate interests of the dominant party, and would cause detriment to the party with less bargaining power if relied upon. The types of terms that could be considered unfair are terms that allow one party, but not the other, to avoid or limit their obligations, to terminate the contract, or to vary the terms of the contract.

UCT legislation currently applies where:

  • one of the parties is a small business, meaning that it employs less that 20 people;
  • the contract is standard form for goods or services, or for the sale or grant of interest in land; and
  • the upfront price payable is no more than $300,000, or $1m if the contract is for longer than 12 months.

The future of UCTs

In September 2020, the Australian Government Treasury released a Regulation Impact Statement for Decision. Treasury’s consultation with stakeholders revealed that UCTs remained common in standard form contracts, and the scope of the existing protections was ambiguous.

On 6 November 2020, the Commonwealth and state and territory consumer affairs ministers agreed to strengthen the existing UCT protections. The key reforms include:

  • making UCTs unlawful and applying civil penalties;
  • expanding the definition of small business and removing the pecuniary threshold requirements; and
  • improving the clarity on when and UCT protections are applicable.

How will this affect your business?

It is likely that UCT protections will be strengthened to provide small businesses further protections and a greater opportunity for enforcement. This could affect your business through greater accountability for larger businesses, a larger chance of enforcement, and the addition of penalties.

If you’d like to learn about whether UCTs apply to your business, how these changes could affect your agreements, or would like us to review your standard form contracts, contact Rebecca Halkett.