Since 2016, the Australian Consumer Law has provided protection for small businesses against ‘unfair contract terms’. On 9 November 2023, major changes to the ‘unfair contract term’ (UCT) regime in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law) and the Australian Securities and Investments Commission Act 2001 (Cth) were introduced.
The expanded UCT regime applies to standard form, small business and consumer contracts made, renewed or varied on or after 9 November 2023.
It is now unlawful for certain standard form contracts to contain any unfair contract terms and there are substantial penalties for proposing, applying or relying on UCT’s. Further, the number and type of contracts which will be captured by the UCT regime has significantly increased.
All businesses, which utilise standard form, small business (or consumer) contracts, should review those documents now, to remove any UCT’s.
Standard form, small business contracts are prevalent in the wine sector, particularly in the area of fruit supply, but also in relation to processing, bulk wine supply, bottling, storage, distribution and online retail sales.
This article just applies to standard form, small business (not consumer) contracts covered by the Australian Consumer Law.
- The new expanded UCT regime will commence on 9 November 2023 and will apply to contracts entered into, renewed or varied on or after this date.
- Individuals and businesses may face substantial pecuniary penalties for proposing or purporting to rely on UCTs.
- The ‘headcount’ threshold for a business party to a ‘small business contract’ increases from fewer than 20 employees to fewer than 100 employees, which significantly expands the number of businesses which will be protected.
- The monetary thresholds for small business contracts are removed, meaning that many more contracts will be covered by the UCT regime.
- The Court’s powers will be expanded, including the power to make orders to void, vary or refuse to enforce the contract or to redress any loss or damage or likely loss or damage.
MAIN LEGISLATIVE CHANGES
1. The concept of ‘standard form contract’
The UCT provisions apply to an unfair term of a small business contract that is also a ‘standard form contract’.
The Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Act), which came into effect on 9 November 2023, clarifies the fact that a contract may still be a standard form contract, despite the existence of an opportunity for a party to negotiate minor changes to the contract or to select a term from a range of pre-determined options.
This means that there is likely to be significantly more contracts which are considered ‘standard form’ and therefore captured by the UCT regime.
2. Broadening the meaning of ‘small business contract’
Prior to 9 November 2023, many small businesses were excluded from the UCT protections due to the relatively low thresholds within the definition of ‘small business contract’. Previously, to be a ‘small business contract’:
- at least one party to the contract had to employ fewer than 20 employees; and
- the upfront price payable under the contract had to not exceed $300,000, or $1,000,000 if it was for a duration of more than 12 months.
However, on 9 November 2023, the Act substantially broadened the definition of ‘small business contract’ to cover a contract for a supply of goods or services (or a sale or grant of an interest in land), at least one party to which satisfies either or both of the following conditions:
- the party makes the contract in the course of carrying on a business and at a time when it employs fewer than 100 persons; or
- the party’s turnover in the last income year was less than $10 million.
The monetary thresholds for a ‘small business contract’ have been removed. The Act’s explanatory memorandum indicates that these monetary thresholds have been eroded by inflation and are now too low to effectively reflect the range of contracts entered into by small businesses and they do not accommodate small businesses in industries where high value contracts with low profit margins are common.
These amendments significantly increase the number of ‘small business contracts’ which are protected by the UCT regime and expand its application to more substantial businesses which may not initially appear to be small businesses.
3. Pecuniary Penalties for UCTs
Before the introduction of the Act, UCTs did not attract any pecuniary penalties. Rather, any UCT found in a standard form, small business contract was merely deemed void or unenforceable.
However, the new UCT regime allows the Courts to impose a pecuniary penalty on a person or business for proposing an unfair term or applying or relying on (or purporting to apply or rely on) an unfair term. A person, who contravenes the new UCT regime, will be found to commit a separate contravention in respect of each such term which is found to be unfair.
The maximum monetary penalty will be $2,500,000 for an individual and, for a body corporate, the greater of:
- $50 million;
- if the Court can determine the value of the benefit obtained, directly or indirectly, and that is reasonably attributable to the breach, 3 times the value of that benefit; and
- if the value of the benefit cannot be determined, 30% of the adjusted turnover of the body corporate during the breach turnover period (i.e. the longer of the period over which the breach occurred or the 12 months ending when the breach ceased).
These penalties are clearly substantial.
4. Powers of the Court
The Act gives greater discretionary powers to the Court where a contract term is found to be unfair. The Court will be able to make orders voiding, varying or refusing to enforce all of a contract, or part thereof, to redress loss or damage that has been caused, or is likely to be caused, by the unfair term(s).
The Court will also be empowered to make any such orders (other than an award of damages) the Court thinks fit to prevent a term, which is the same as, or substantially similar to, an unfair term, being included in any advantaged party’s future contracts or to redress (in whole or part) any loss or damage caused, or likely to be caused, by such a term in any other existing contract entered into by the advantaged party.
Persons who contravene, or are involved in the contravention of, the new UCT provisions may also be disqualified by the Court from managing corporations.
WHAT TERMS ARE UNFAIR
Under the Australian Consumer Law, a term of a ‘small business’ and ‘standard form contract’ is unfair, if it:
- causes a significant imbalance in the parties’ rights and obligations under the contract;
- is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- would cause detriment (financial or otherwise) to a party if it were to be relied upon.
In determining whether a term is ‘unfair’, a Court must take into account the extent to which the term is transparent (expressed in reasonably plain language, legible, presented clearly and readily available to the parties) and the contract as a whole.
Certain terms of wine sector contracts, which may be unfair (depending on the circumstances and the contract as a whole), include the following:
- a term that requires a grower to sell excess grapes to a winemaker, but does not require the winemaker to match competitor offers;
- a term that requires a grower to enter into a new grape supply agreement with a winemaker, but does not require the winemaker to match competitor offers;
- a term allowing a winemaker, but not the grower, to unilaterally vary the maturity, purity and condition specifications (“moving the goalposts”);
- a term allowing one party, but not the other, to unliterally terminate the agreement with short or no notice;
- automatic or one-sided renewal rights;
- lengthy payment terms;
- one-sided limitation of liability or indemnity clauses; and
- terms allowing one party to exercise an unfettered or absolute discretion where not necessary to protect that party’s legitimate interests.
All businesses, which utilise standard form, small business (or consumer) contracts, should review those documents now, to remove any UCT’s, given the significant penalties now applicable.
Some examples of clauses to replace potential UCT’s include those providing as follows:
- exercising discretion reasonably, having regard to the protection of the legitimate interests of the party exercising that discretion;
- replacing an obligation to act immediately with an obligation to act promptly or preferably within a reasonable set time period;
- requiring notice, and an opportunity to remedy default, to be given before termination for breach;
- making any limitation of liability mutual; and
- making indemnities mutual and restricting recovery under an indemnity where loss suffered was as a result of the indemnified party’s breach, negligence or misconduct.
Wine businesses should also take care, in exercising discretions pursuant to a wine sector contract, not to engage in so-called ‘unconscionable conduct’, for which they can also be penalised substantially under the Australian Consumer Law. For example, fruit and wine assessments should be undertaken rigorously, diligently, fairly and transparently.
This Alert is intended as general information only. It does not purport to be comprehensive advice or legal advice. Readers must seek professional advice before acting in relation to these matters.