As long as the person signs on the dotted line, the contract is enforceable, right?
Nope. Gone are the days of Australian businesses relying on fine print, non-negotiable agreements which leave customers hoping they haven’t signed over a kidney.
In this update, we look into amendments to the Australian Consumer Law (ACL) coming into force next month which will significantly widen the scope and impact of existing laws preventing businesses from relying on unfair contact terms (UCTs) and penalising those who seek to do so.
What is an unfair contact term?
An UCT is a term which typically makes you stop and think – is that really allowed? More technically though, it’s a term which causes significant imbalance between the parties, which is not reasonably necessary to protect the legitimate business interests of the party, and which would cause significant detriment if relied on by that party.
The ACL provides examples of terms which may be UCTs, like a term that permits only one party to terminate, renew or vary a contract; or a term that gives only one party an indemnity for breach of contract.
Laws preventing UCTs have been around for a while now. But until now, the main consequence of including a UCT in a contract is a court declaring that term void and unenforceable. There are no penalties imposed on a party relying on a UCT. The existing regime has been a “toothless tiger” to some.
The impending changes to the UCT regime are gaining a lot of attention for two reasons: first, because of the new (and very steep) penalties coming into force, and second, because of the significant expansion of the scope of B2B contracts that will be caught by these laws. The changes are likely to have a material impact on the drafting of goods and services contracts in Australia.
Currently, the ACL prevents the use of UCTs in standard form contracts between a business and:
- any consumer (B2C) where the business is providing goods and services to the consumer for private and domestic purposes (think a mobile phone or car contract); and
- any other business (B2B) where (i) the contract is for the supply of goods and/or services or sale/leasing of land, (ii) one of the businesses to the contract is a small business, and (iii) the upfront value of the contract does not exceed $300,000 (or $1 million if the contract duration is more than 12 months).
From 9 November 2023, these provisions will broaden, capturing more types of businesses and more types of contracts. And the penalties for breaching these provisions will increase significantly too – against corporations, up to the greater of $50 million, three times the benefit of the conduct, or 30% of turnover during the breach period. Scary stuff!
The provisions will be broadened in two main ways:
- Broader meaning of “small business”. Currently, a small business under the UCT regime is one with fewer than 20 employees. Following the changes, a small business will be one with fewer than 100 employees OR any business with an annual turnover of less than $10 million in the last financial year.
- Removal of upfront value condition for B2B contracts. There will no longer be a value limit on B2B contracts caught by the UCT regime. As long as one of the parties to the contract is a small business, the contract will be caught by the UCT regime.
As a result of these changes, more B2B contracts will be caught by the UTC regime than ever before.
The widened UCT regime will apply to any standard form contracts entered into, renewed or varied from 9 November. That’s important: it means existing contracts can get caught by the UCT regime once they’re updated or renewed.
What is a standard form contract?
The UCT regime only applies to standard form contracts. Any contract which is offered on a “take it or leave it” basis is typically standard form (think of the “I agree” button you click just before updating your mobile phone software). But the test is not that limited. A contract can still be standard form where the party with greater bargaining power allows some changes during negotiations. A contract is unlikely to be excluded from the UCT regime simply because the more powerful party allows the customer to make small edits.
The ACL already includes criteria for the courts to use in determining if a contract is standard form. These will be expanded with the legislative changes. Now, courts will be free to ignore evidence from the party relying on the UCT that the same base contract was negotiated by others, in order to argue that the contract under dispute isn’t standard form because others had an effective opportunity to negotiate the same contract. This emphasises that it is the circumstances of the particular transaction that will be most relevant.
How will these laws affect IP-related agreements?
IP provisions in standard form agreements can be subject to UCT laws just like any other term.
But “pure” IP assignment and licensing agreements, and even trade mark coexistence agreements, are unlikely to be captured by the UCT laws. That’s because:
- these agreements are typically drafted with a particular transaction in mind; they’re not precedents rolled out by a party for use with many customers;
- they’re typically negotiable if the agreement is made at arm’s length; and
- arguably, these agreements don’t involve the supply of any goods or services: a necessary precondition for application of the UCT laws.
But if IP provisions are tied up in a broader standard form contract for the provision of goods and services between businesses, then those provisions will be captured by the UCT regime where one of the parties is a small business. By way of example, if there is no legitimate business interest for their inclusion, terms such as the following may be caught by the UCT regime:
- a term requiring one party to automatically assign any IP they create/own to the other party;
- a term indemnifying one party (but not the other) if any warranties relating to any IP rights being assigned or licensed under the contract are breached;
- a term allowing one party to unilaterally vary the terms of an IP licence granted under a services agreement during the licensing period;
- a term which automatically extends the term of a paid IP licence unless the licensee terminates before a specific date, where the licensor is not required to provide any notice to the licensee of the upcoming extension.
Can the UCT regime be avoided?
There are certain types of contracts where it will be virtually impossible to avoid the UCT regime. For example, online T&Cs for the use of platforms, websites, software and apps by consumers and small businesses, where use is conditional on accepting the T&Cs. There’s no realistic opportunity for negotiating these terms. So any potential UCTs must be removed from these contracts to avoid the penalties.
Then there are contracts that might be standard form, but not always. For example, a B2B services agreement or contactor agreement. Typically, these agreements are prepared in precedent form by a business and rolled out to any prospective client or contractor. If the client or contractor wants to do business, they have to agree to the contract’s terms. To steer clear of the UCT regime, the business offering the contract would need to invite prospective clients or contractors to negotiate, consider any proposed changes and provide legitimate reasons why those changes cannot be accepted. Obviously, this invites unwanted cost and complexity.
I don’t want to be fined. What should I do?
To mitigate the risk of penalties under the UCT regime:
- Wherever possible, give the other party a meaningful opportunity to negotiate – even if you’re using a template. This reduces the risk that your contract will be considered a standard form contract.
- Ask your lawyers to review your key template/standard form contracts and redraft any potential UCTs. There should be a legitimate business reason for any one-sided terms remaining in the contract.
The safest form of risk mitigation is the surgical approach. That involves:
- identifying which of your business’ contracts might be considered “standard form” (remembering that one of the parties must be a small business or a consumer acquiring goods and services for private/domestic purposes); and
- deleting or redrafting any potential UCTs from those contracts.
Transparency is relevant in assessing whether a particular contract term is a UCT. If a one-sided term is buried within the contract, even though there might be a legitimate business interest to include it, a court could declare that term to be a UCT because its inclusion was not made transparent to the other party. So if you decide for whatever reason to retain any one-sided terms within your standard form contracts, they should be signposted at the start of the contract.
Is your business ready?
Contact us if you need any assistance with reviewing your standard form contracts or negotiating processes.