From 9 November 2023, significant penalties will apply to businesses that include unfair contract terms in their standard form contracts.
This insight summaries the key changes to the unfair contract terms (UCT) regime and how your organisation can prepare for them.
What contacts are subject to the regime?
The UCT regime applies to ‘standard form’ contracts with consumers or small businesses. The definition of ‘small business’ has been significantly expanded to include any business that employees 100 people or less or any business with an annual turnover of less than $10million. Most if not all SMEs will be considered ‘small businesses’.
A contract will be in ‘standard form’ where it is repeatedly used and where the counterparty does not have a genuine opportunity to negotiate it.
In a travel and tourism context, customer booking conditions will clearly be considered ‘standard form’ and subject to the UCT regime.
What is considered unfair?
A contract term will be ‘unfair’ if it:
- would cause a significant imbalance in the parties’ rights and obligations;
- is not reasonably necessary to protect legitimate business interests; and
- would cause detriment (financial or otherwise) if it were to be applied.
At a practical level, whether a term is unfair will probably be determined by assessing whether it goes beyond what is necessary to protect a legitimate business interest.
Amongst others, the following types of terms have commonly been held to be unfair:
- discretions of one party to determine a matter or vary terms including prices. In a travel context, operators need to closely assess the fairness of terms such as price surcharging and itinerary variations;
- cancellation charges that do not reflect an organisation’s actual losses or a genuine estimate of losses resulting from cancellation. In a travel context, operators need to assess the fairness of standard sliding-scale
- cancellation charges which can impose cancellation fees of up to 100% even though the business may not have incurred certain expenses prior to cancellation; and
- termination rights that allow a party to terminate for minor breaches or without reasonable time to remedy the breach. In a travel context, operators need to assess whether they should give notice of missed balance payments prior to terminating a customer’s booking.
When assessing the fairness of a term, the courts must take into account the transparency of a term and the contract as a whole.
The ACCC has emphasised that its focus is on ensuring terms are ‘proportionate, transparent and clear, so any obligations are easily understood and able to be realistically adhered to by customers’.
What are the penalties?
For a corporation, the potential maximum penalty for each unfair term will be the greater of:
- $50million;
- 3 times the value of the benefit (if the court can determine the value of the benefit); or
- 30% of the adjusted turnover during the breach turnover period (if the court cannot determine the value of the benefit).
Company officers and senior managers who have been involved in the application or reliance of the unfair term are subject to personal penalties of up to $2.5million.
Importantly, it doesn’t matter if the business never intended to rely on the term – the fact it is included in the contract is a breach itself.
What do you need to do to prepare for November 2023?
It is critical that business implements a mitigation strategy to reduce the risk of enforcement action being taken. We strongly suggest that businesses:
- review standard form contracts to identify potentially unfair terms;
- obtain legal advice on potentially unfair terms;
- document their review processes, including amendments made to some terms and reasons for not amending others.
