Legal Update Alert: Changes to the unfair contract term regime and increased fines – are you ready?
From 9 November 2023 there are significant changes coming to the unfair contract terms (UCT) regime – and these may now apply to you. These changes primarily involve expanding the scope of the regime, so now affecting agencies that were previously exempt, and increasing penalties for non-compliance.
In summary, it will be illegal to enter into, use or seek to apply a standard form consumer or small business contract that contains unfair contract terms. The new UCT regime/changes will apply to standard form contracts made or renewed on or after 9 November 2023. The new UCT regime/changes will also apply to any terms of a contract that are varied or added on or after 9 November 2023. So, let’s take a quick look over the new changes, refresh our standard form contract and unfair contract terms knowledge, and get your agency all set for November.
Who will these changes apply to?
The UCT regime applies to contracts where at least one party to the contract is a small business. A ‘small business’ is one that has less than 100 employees or has an annual turnover of less than $10 million. Previously, the regime only applied to a business that employed fewer than 20 people.
The regime has also removed the contract value threshold. Previously, the UCT regime applied to small business contracts with a value of less than $300,000, or if the contract was for a period of 12 months, then less than $1 million. Starting in November, only the business size criterion mentioned earlier will be used and will apply to standard form contracts of all values. The only exception to this is when a small business enters an agreement for financial services or products, and only if the contract value is for more than $5 million.
The contracts the UCT regime will apply to include standard form contracts to:
Supply goods or services
Sell or lease land
Supply financial services/products
So, if your real estate agency has less than 100 employees or a turnover of less than $10 million – then these changes will apply to your standard form contracts. Most likely, these rules will apply to your contracts dealing with supply of goods/services (eg. rental management services) and the sale or lease of land. Well, what happens if you’re real estate agency isn’t a small business? The UCT regime will apply to any contracts where the other party is a small business.
What are the penalties for non-compliance?
The inclusion and use of unfair contract terms is now an offence. The financial fines for non-compliance have increased significantly. The maximum financial penalty for an individual is $2.5 million. The maximum financial penalty for a corporation will be the greater of:
$50,000,000;
three times the value of the "reasonably attributable" benefit obtained from the conduct, if the court can determine this; or
if a court cannot determine the benefit, 30 per cent of adjusted turnover during the breach period.
Previously, if a standard contract with a UCT came before the court, the term would be held to be void and unenforceable. The reforms now give the court greater power when faced with UCTs, including:
The ability to void or vary the UCT, or any part or all of the contract
Prevent the use of the UCT in future contracts
Make orders to void the use of a UCT that is the same or substantially similar in existing contracts, whether the contract is before the court or not
What is a standard form contract?
Standard form contracts are more generalised agreements, with terms and conditions applied repeatedly to multiple parties. Typically, a standard form contract is drafted by one party, and the other party has minimal to no power to negotiate the terms. These contracts are issued on a ‘take it or leave it’ basis. Other contracts are typically more individualised, tailored to the specific needs and circumstances of the contracting parties.
For example, a contract with a tradesperson will contain specifics about the work to be performed, quotations, time periods – as this is tailored to the individual circumstances, this is not a standard form contract. On the other hand, agreements offered on a repetitive basis, like franchise agreements, IP licences or expressions of interests, are standard form contracts.
So, what makes a standard form contract exactly? While there isn't an exact definition, the courts typically consider a few factors, including:
The power imbalance between the parties – whether one party, the dominant party, has all or most of the bargaining power
Whether the contract was drafted by the dominant party without discussion with the other party
Whether the other party was required to ‘take it or leave it’, so either accept the terms in their present form or reject them
Whether the other party was given the opportunity to negotiate changes that are not minor or insignificant in effect
Whether the individual circumstances have been factored into the contract
What are unfair contract terms?
When deciding if a term is unfair, there is a three-limb test for unfairness the courts will apply. A term will be unfair if it:
would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Some common examples of UCT’s include terms that:
Allow one party to terminate and not the other
Pose excessive early termination penalties
Penalise one party for termination or breach and not the other party
Pose sanctions that are greater than those imposed by the law
Allow one party to automatically renew the contract without notice
Allow one party to unilaterally vary the terms of the contract
Unreasonably limit the liability of one party
For example, if you were a party to a franchise agreement where only the franchisor was given the power to terminate the contract, then this would be an unfair contract term. Or lets say you’ve distributed EOI’s for apartments in a complex that are still to be inhabited. Now, if you impose a hefty penalty on a party if they back out of that EOI, including the retention of large deposit, then this may be found to be an unfair contract term.
How do I get my agency ready for November?
Your first step is to determine whether your agency falls under the regime by undertaking the business size test discussed earlier.
If it does, then your obligations are straightforward – don’t use unfair contract terms in any standard form contracts you are offering, signing, or renewing.
If you are planning to vary a term in an existing contract after 9 November, make sure the new/updated term isn’t unfair.
Your next step should be to conduct an audit of your contracts to assess whether they are standard form agreements and to identify any terms that might potentially be considered unfair. Mitigating the risks of this before November hits could save your agency millions.
But what happens if your agency is currently not considered a ‘small business’ under the regime, but this changes later? What happens if you have 100 employees in November, then downsize to 90 in December? What if your ‘small business’ is part of a larger corporation? Or you run a small real estate agency under a larger franchise? When it comes to operating your business, we understand that circumstances are continuously changing. As a result, you may find yourself transitioning in and out of the 'small business' category within the UCT regime, or facing doubt as to your agency’s status.
So, what’s the solution? We suggest adopting a regulatory risk approach by being thorough in capturing your contracts. This means avoiding UCT’s in all contracts, and when it comes to your standard form contracts, work on the assumption that your agency is a ‘small business’ even when it isn’t. Given that penalties can now reach up to $50 million, it's advisable to take a proactive approach to your contracts rather than a reactive one.
Whats Next?
Uncertain about your contract classifications, if your terms are unfair, or the impact of the new reforms to your agency? Don’t risk millions – sort it out with an expert before November. Book your free 10 min chat with our team to get started.
Boring legal stuff: This article is general information only and cannot be regarded as legal, financial or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us.