Background – ‘UCT’ Legislation

The introduction of the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (the Bill) by the Labor Government on 28 September 2022, proposed reforms to the Unfair Contract Term (‘UCT’) regime in the Australian Consumer Law (‘ACL’).

The UCT reforms will come into effect 12 months after Royal Assent (expected November 2022).

The reforms will significantly increase the financial and reputational risks for businesses contracting with Australian small businesses across a range of industries and sectors.

The new laws will make unfair terms in ‘standard contracts’ unlawful via the introduction of a prohibition on proposing, applying, relying or attempt to apply and rely on those unfair terms. It will also clarify issues such as what is a standard form contract (which until now has been unclear).

The reforms also introduce severe penalties for breach. Under the new laws, for each contravention of the prohibition against unfair terms, corporations face maximum penalties of $50 million or more under ACL and 50,000 penalty units or more under the ASIC Act 2001 (Cth) (‘ASIC Act’), with greater penalties if the percentage of annual turnover or benefit derived from the unfair terms exceed these amounts.    

Key Changes
The reforms include:

• Expanding the scope of protected contracts 
  The reforms expand the definition of ‘small business contracts’, and accordingly UCT protections will apply to a broader range of agreements.
  • Under the ACL, regardless of the contract value, a contract will be considered a ‘small business contract’ if:
  • At least one party to the contract has less than 100 employees OR an annual turnover of less than $10 million.

• Under the ASIC Act, the previous monetary threshold will increase significantly, and a contract will be considered a ‘small business contract’ if:
  • At least one party to the contract has less than 100 employees OR an annual turnover of less than $10 million (as opposed to the current criteria of less than 20 employees); and
  • The upfront price payable under the contract does not exceed $5,000,000.

• Introducing prohibitions on UCTs with penalties attached
  The new laws will introduce a statutory prohibition on proposing, applying, relying, or purporting to apply or rely on, UCTs in a standard form contract.

Penalties

The maximum penalties for each contravention of the statutory prohibition are now quite severe:

• For Individuals $2.5M (under the ACL) and the greater of 5,000 penalty units ($1.1M currently) OR the court can determine the amount of befit received or detriment avoided (ASIC ACT).
• For Corporations the grater of $50M, there times the benefit received from the contract OR 30% of the companies adjusted turnover during the breach period.

Other amendments

• Increased court powers
  The new laws clarify and strengthen the existing powers of a Court to make orders for: redress, prevention or to remedy the actual or likely loss or damage as a result of a term the Court declared to be unfair.

• Exemptions 
  The new laws also specify certain exemptions depending on whether the ACL or ASIC Act applies. A few examples include:
  • contract terms that define the main subject matter or the upfront price payable under the contract;
  • contract terms required or permitted by a Commonwealth, state or territory law; and
  • certain life insurance contracts made on or after 5 April 2021.

• Further considerations for ‘standard form contracts’
  The new laws provide greater clarity on factors that can be considered when determining whether a contract is a standard form contract. In addition, a Court must also consider whether a party has used the same or similar contracts before. The new laws also clarify that a contract may still be considered a standard form contract despite there being an opportunity for a party to:
  • negotiate minor or insubstantial changes;
  • select a term from a range of options presented by the other party; or
  • another contract to negotiate the terms of the other contract.

• Renewal and variations
  The reform to the UCT regime will apply to:
  • new contracts entered into on or after the commencement of the UCT reforms (being 12 months after Royal Assent).
  • an existing contract renewed on or after the commencement of the UCT reforms, from the date the renewal takes effect.
  • a contract term that has been varied or added to an existing contract after the commencement of the UCT reforms. If the rest of the existing contract is not varied or renewed on or after the commencement of the UCT reforms, the UCT reforms will not apply to the rest of that contract.

What does business need to do?

• Businesses need to carefully examine their current contract management systems and governance processes to identify areas that require change in the transition period.
  • This includes a system of examining which contracts are in scope for review; and 
  • Careful examination of any contracts they are parties to with larger business and open up negotiations.
• Businesses need to manage, and remediate their standard form contracts for unfair contract terms, and also address and respond to concerns or complaints raised by contracting parties and regulators regarding contractual terms.
• Businesses need to develop a tailored methodology and risk framework, informed by experienced legal expertise and regulatory guidance. This will assist in the required review and minimise the risk of relying on unfair contract terms.
• Businesses need to consider whether they have access to a pool of skilled resources to facilitate a timely and cost-efficient large-scale contract review before the UCT reforms come into effect (12 months after Royal Assent).

How will this affect Defence Contracts?

• Any existing Defence contracts with larger companies / primes should be looked at carefully. A good argument could be run that any deviations from the ASDEFCON templates should be looked at as they generally favour the larger company, and may fall foul of the new UCT regime.
• Any non-standard contracts (for example a primes own terms) will need to be looked at very carefully, as prima facie they will favour the larger company.

 How can I help?

I can assist with this review process by accessing legal and commercial resources with years of experience in negotiating, drafting and managing large contracts in the Defence and government space.