Insights

Significant changes to unfair contract terms laws (UCT) come into effect on 9 November 2023. These changes will affect businesses of all sizes, including startups and scale-ups that use standard form contracts when dealing with consumers or small businesses.

The new unfair contract term laws are found in two different pieces of legislation – the Australian Consumer Law (ACL)[1], and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The nature of the goods and services you supply as a startup (or other business) partially determines which piece of legislation applies to you (or if either act applies at all).

We expect the new laws will be beneficial overall for startups and scale-ups, as they will likely encourage larger counterparties dealing with startups, and scale-ups (and other businesses) to offer fairer and more transparent terms. However, businesses will also need to consider the potential impact of incoming legal changes to their business relationships with other parties, such as suppliers or customers. From this perspective, in the short term, we expect the new laws will increase compliance costs as startups and scale-ups (and other businesses) adjust their standard form contracts to meet the new legal requirements.

Why are changes to the unfair contract term laws important?  

Australian unfair contract term laws are designed to protect consumers and small businesses from contracts that contain terms that are overly one-sided, unclear, or impose unfair obligations on one party. UCT laws apply to contracts for goods and services (including the sale or grant of an interest in land), and financial products and services. UCT laws can apply to contracts between businesses as well as between businesses and consumers.

Upcoming changes to the ACL and the ASIC Act are significant, including because:

• the changes will prohibit the proposal of, use of, application of, or reliance on, UCT in a standard form consumer or small business contract and strengthen available remedies and enforcement actions available (including by clarifying and expanding the powers of the court);
• under the existing regime, UCT protections in the ACL and the ASIC Act provide that where a court finds a term is unfair, the term is void. However, that approach did not provide sufficient deterrence to the use of UCTs, so the new regime introduces a new civil penalty regime that prohibits the use of and reliance on unfair contract terms in standard form contracts;
• the class of contracts that are captured under the new UCT regime is broader:
  • the small business definition threshold has been varied:
    • under both the ACL and ASIC Act, a small business is one with less than 100 employees (previously it was less than 20 employees) or where one party has a turnover for the last income year of less than $10,000,000. This means that more businesses (including more startups and scale-ups) will fall into the meaning of a small business than under the previous regime; and
    • the contract value threshold for contracts under the ACL has been removed and the value threshold for contracts regulated by the ASIC Act has been raised to $5,000,000.

• the variations mean that the new UCT regime captures a larger class of small business standard form contracts than were previously covered; and
• generally, the new laws clarify and strengthen the unfair contract terms provisions including without limitation by:
  • requiring the courts to take repeat usage of a contract when determining if a contract is a standard form contract;
  • clarifying that a contract may still be a standard form contract despite there being an opportunity for:
    • a party to negotiate changes that are minor or insubstantial in effect;
    • a party to select a term from a range of options determined by another party; or
    • a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

Key Takeaways

Overall, the changes to unfair contract terms laws are likely to be beneficial for startups, scale-ups and other small businesses by providing them with greater legal protections and ensuring that they are not unfairly disadvantaged in contract negotiations with larger counterparties. However, as the changes are designed to protect both consumers and small businesses, all businesses entering, renewing, or varying customer or B2B standard form contracts will need to comply with the new UCT regime from 10 November 2023 to avoid legal and reputational risks.

How can we help you?

Whether you are a startup, a scale-up or otherwise, we can assist by reviewing your standard form contracts to ensure that they will comply with the new laws. Our work often involves removing or modifying any terms that are considered unfair, or providing additional information or disclosures to consumers or small businesses to ensure that they understand the terms of the contract. You may also need to consider alternative ways of structuring your contracts, such as negotiating individual terms with customers or using more tailored contracts that consider the specific needs and circumstances of each customer. Either way, we are here to help.

Want to learn more? We would love to hear from you.

[1] The Australian Consumer Law is located in Schedule 2 of the Competition and Consumer Act 2010.