Sierra Series: Unfair Contract Terms Under the Microscope

Welcome to the first edition of the Sierra Series, where we take a closer look at legal issues we encounter daily in practice - and offer practical, actionable tips to help businesses stay compliant and commercially sound.

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In this edition, we’re putting unfair contract terms under the microscope.

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It’s been nearly two years since the reforms to the unfair contract terms (UCT) regime under the Australian Consumer Law (ACL) came into effect. Since 9 November 2023, unfair terms in standard form contracts have not only been void - but they’ve also been illegal, with significant penalties applying to each term found to be unfair.

Despite the time that’s passed, we continue to see certain high-risk clauses crop up in contracts.   Over the next three weeks, we’ll unpack three “usual suspects” - common clauses that often fall foul of the UCT regime - and show how they can be amended to reduce risk and reflect fair commercial practice.

In this edition of the Sierra Series, we’ll cover:

1. Early Termination Fee Clauses
2. Automatic Renewal Clauses
3. Liability and Indemnity Clauses

Whether you’re reviewing supplier agreements, customer contracts, franchise agreements or other standard form contracts, this series is designed to help you spot the red flags - and fix them.

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UCT Regime Refresher: What You Need to Know

The UCT regime under the ACL applies to “standard form contracts” where one party is either:

• a consumer (someone who acquires goods or services priced at $100,000 or less, or goods or services ordinarily acquired for personal, domestic or household use, or a vehicle/trailer used to transport goods – excluding where goods are acquired for re-supply, or are to be used or transformed in production or manufacture, or are to be used in repairing other goods or fixtures); or
• a small business (businesses with fewer than 100 employees or less than $10 million annual turnover).

A standard form contract is typically a “take it or leave it” agreement - one party prepares the contract, and the other has little or no ability to negotiate its terms.   Courts will generally consider factors such as whether:

• one party had all or most of the bargaining power;
• the contract was offered on a non-negotiable basis;
• the terms were tailored to the other party or transaction; and
• similar contracts have been used repeatedly.

Even if minor changes are permitted or options are presented from a pre-set list, the contract may still be considered standard form.

Under section 24 of the ACL, a term is considered unfair if it:

• causes a significant imbalance in the parties’ rights and obligations;
• is not reasonably necessary to protect the legitimate interests of the advantaged party; and
• would cause detriment (financial or otherwise) to the other party if enforced.

The UCT regime was strengthened in November 2023, when reforms came into effect that:

• made unfair terms illegal, not just void; and
• introduced substantial penalties for proposing, using or relying on unfair terms - including fines of up to $50 million per contravention for companies.

These reforms apply to contracts entered into, renewed or varied on or after 9 November 2023.

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Next week, we put the first of our usual suspects under the microscope: early termination fee clauses.  Stay tuned.