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Reforms & Penalties for Unfair Contract Terms (UCT) - Update

An opportunity to reframe contracting and create long-term value

Rachel Besley
Ella White

A rising number of legal, regulatory and social issues are leading to some of the biggest changes to the contracting landscape in over 20 years. Among these changes, is the introduction of the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 (the Bill) by the Labor Government on 28 September 2022, which proposed reforms to the Unfair Contract Term (UCT) regime.

As of 27 October 2022, the Bill received unanimous agreement and has passed both Houses of Parliament. The UCT reforms will come into effect 12 months after Royal Assent (generally between 7 – 10 working days following the Bill passing through Parliament).

The reforms will significantly increase the financial and reputational risks for businesses contracting with Australian consumers and small businesses across a range of industries and sectors. In line with the Bill put forward by the former Liberal Government, among other amendments, the new laws will make unfair terms in standard contracts unlawful via the introduction of a prohibition to propose, apply, rely or attempt to apply and rely on those unfair terms. Furthermore, the reforms introduce severe penalties (even more compared to the $10 million put forward by the former Liberal Government). Under the new laws, for each contravention of the prohibition against unfair terms, corporations face maximum penalties of $50 million or more under the Australian Consumer Law (ACL) and 50,000 penalty units (currently $11.1 million, but will be higher following the proposed increased in the value of the penalty unit announced on Budget night) or more under the ASIC Act 2001 (Cth) (ASIC Act), with mechanisms providing for greater penalties if the percentage of annual turnover or benefit derived from the unfair terms exceed these amounts.

It is strongly recommended that businesses mitigate their UCT risk by preparing during the 12-month transition period. This is also a prime opportunity for businesses to re-evaluate internal procurement systems and processes, and contracting controls and governance, to build and enable a better contracting experience for customers and other contracting parties.

 

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.

The maximum penalties for each contravention of the statutory prohibition are as follows:

Increased court powers

The new laws clarify and strengthen the powers of the Court to make a variety of orders to redress, prevent, or 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 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.

Expansion of ASIC and ACCC’s powers

The reforms have also responded positively to the various consultation submissions which called for additional powers for ASIC and ACCC in relation to UCT. For example, to issue notices and seek disqualification orders to prevent a person from managing a corporation.

What can businesses do to prepare themselves for the changes?

Please see our blog on how businesses can prepare for these changes.

What you need to do

Our view is that complying with the reforms requires not only sound legal advice, but also thoroughly considered operational design leveraged by technology accelerators. We are committed to helping clients reframe the contracting processes to enhance responsible contracting and create longer term value for their businesses.

We recommend you to:

1. Undertake our Deloitte UCT Organisational Readiness Discovery Workshop.

Businesses need to understand the maturity of their current contract management systems, controls and governance processes to identify areas that require uplift in the transition period. Activities include contract collation and metadata extraction to better understand your customer and supplier base and which contracts are in scope for review.

2. Understand the impact of the changes.

Businesses need to proactively 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.

3. Streamline the contract creation and management process.

Businesses need to uplift their governance framework in the contract creation and management process. This will enable businesses to have better clarity and transparency about the relevant stakeholders who can proactively manage contracts on an ongoing basis. This will also create long-term value for businesses, particularly those that have divested contract creation and management functions across various business units or third parties without a central contract repository used by all the relevant stakeholders.

4. Design a contract review methodology and Quality Assurance framework.

Businesses need to develop a tailored methodology and risk framework, informed by high-end legal expertise and regulatory guidance. This will facilitate the required review and minimise the risk of relying on unfair contract terms. This will also enable the review to be scaled up, as required.

5. Plan resources for surge capacity

Businesses need to consider whether they have access to a large 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).

6. Stocktake and adapt innovative and fit-for-purpose contract creation and management technology tools.

Businesses need to re-evaluate and enhance the use of contract creation and CLM tools to minimise the time, costs and risks involved in the initial UCT contract review. Efficient use and adaptation of fit-for purpose tools could also provide long-term value through the management of contract negotiations, renewal, and termination.

Contact us

At Deloitte, we can bring you expert legal advice as well as operational scale and innovative technology to deliver practical end-to-end or modular business solutions.