Posted: 13 Dec. 2021 5 min. read

Proposed Reforms & Penalties for Unfair Contract Terms (UCT)

How can contract issuing businesses reframe the contract review process to create long-term value?

Proposed changes to the Unfair Contract Term (UCT) protections, will if passed, significantly increase the financial and reputational risks for businesses contracting with Australian consumers and small businesses across a range of industries and sectors. The draft bill containing the proposed changes to the UCT protections proposes civil penalties, which for corporations, may be the greater of either $10 million, three times the value of the benefit obtained from the contravention or 10% of the company’s annual turnover per contravention[A1]. With the bill expected to be passed in early 2022 in the midst of bi-partisan support and the proposed changes likely to commence six months after, it is strongly recommended that businesses mitigate their UCT risks by preparing in advance of these changes. [A2] This is also a prime opportunity for businesses to re-evaluate internal procurement systems and processes to build and enable a better customer contracting experience for customers and other contracting parties.

Key Proposed Changes

The final form and substance of the UCT amendments is yet to be finalised – with Treasury currently considering the extensive stakeholder submissions to the public consultation, which closed on 20 September 2021. However, in its current form, the draft exposure bill proposes to make the following significant changes to the UCT provisions under the Australian Securities Investments Commission Act 2001 (Cth) and the Australian Consumer Law: 

  1. Expanding the scope of protected contracts - if passed, the UCT protections will apply to a much broader range of small business contracts – including any standard form contract involving a party that has less than 100 employees (as opposed to the current criteria of less than 20 employees) or an annual turnover of less than $10 million. The bill will also abolish the contract value threshold, which currently limits the application of the UCT protections to ‘low value’ small business contracts.1
  2. Introducing prohibitions upon UCTs - the bill seeks to introduce statutory prohibitions upon proposing, applying or relying upon an UCT in a standard form contract. This is a shift from the current UCT regime whereby a term that is held to be unfair by the Courts will only be deemed void.
  3. Introducing financial penalties - the bill provides that each contravention of an UCT prohibition could attract significant civil penalties of up to $500,000 for individuals or, for corporations, the greater of either $10 million, three times the value of the benefit obtained from the contravention or (if the benefit is not determinable) 10% of the company’s annual turnover.2

A number of consultation submissions also called for additional remedies including public warning notices and disqualification of individuals from managing a corporation. Treasury has not indicated if these additional remedies will be incorporated into the proposed bill.

What do these changes mean for businesses?

Upon the bill passing and coming into effect, businesses using standard form contracts and regularly dealing with Australian small businesses and consumers will need to be vigilant about the risks associated with entering and renewing these contracts – as a single contract may contain multiple contraventions each giving rise to a significant pecuniary penalty. Businesses will have to assess whether their contracting parties satisfy the new broader definition of a ‘small business’ or whether contracts previously excluded from the scope of protections due to the ‘low value’ contract value threshold are now covered.

Whilst the proposed reforms have not yet been finalised or passed, there are activities that businesses can, and should do to prepare themselves for the passing of the bill and the subsequent changes to the UCT protection – including undertaking a thorough contract review process to identify and remediate potentially unfair contract terms.

Given the broader application of the new anticipated UCT protections and the proposed higher stakes involved, it’s likely that this review process will need to be far more extensive than previous reviews undertaken in preparation for the 2016 expansion of the UCT regime to what at the time was a more limited range of small business contracts.

Businesses should also consider adopting a proactive approach towards their standard form contract creation and management – driven by the potential financial penalties arising from reliance upon an UCT and the new statutory presumption that, if a term is declared by the Courts to by an UCT, any similar terms will also UCTs. If the reform is introduced in its current form, businesses will be required to monitor and quickly respond to UCT cases and associated industry developments.

With the need to review and remediate already there, General Counsels and procurement teams should also see this as an opportunity to implement a contract review and creation software to make engaging with clients and suppliers a simple and easy process whilst at the same time mitigating the risks of UCT non-compliance.

Next Steps – How to reframe the contract review process to create long-term value

Our view is that a successful large-scale contract review requires not only sound legal advice but well thought out operational design leveraged by technology accelerators and operational design.

We are able to assist businesses to get ahead of the proposed UCT reform by:

  1. Understanding the impact of the proposed changes –proactively managing, responding and remediating concerns or complaints raised by contracting parties and regulators regarding contractual terms.  
  2. Streamlining the contract creation and management process – assisting businesses in collating and centralising all contracts that are in negotiation, on foot and/or pending renewal. This will enable businesses to identify and assess the relevant stakeholders and contracts, and proactively manage contracts on an ongoing basis. This infrastructure will 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 streamlined central contract repository.
  3. Designing a contract review methodology and Quality Assurance framework – Deloitte Legal is able to design a tailored methodology and risk framework, informed by high-end legal expertise and regulatory guidance, to facilitate the review and minimise the risk of relying on unfair contract terms. This will also enable the review to be scaled up, as required.
  4. Providing resources for surge capacity – providing access to a large pool of skilled resources to facilitate a timely and cost-efficient large-scale contract review before the proposed UCT reforms come into effect.
  5. Providing innovative and fit-for-purpose contract creation and management technological tools – to minimise the time, costs and risks involved in the initial UCT contract review, whilst also providing long-term value through the management of contract negotiations, renewal and termination.

Early contract preparation will also give businesses the opportunity to improve efficiencies with contracting and procurement, protect brand reputation and build trust with their customer base.

Contact Us

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Co-authors:

Rachel Besley

Mandy Lim

Christine Wang

 

1Pursuant to s 23 of the Australian Consumer Law, the maximum value threshold for a ‘small business contract’ is an upfront payable price of less than $300,000, or $1 million if the contract has a duration of more than 12 months. 

2Competition and Consumer Act 2010 (Cth) s 224.

More about the authors

Ella White

Ella White

Partner, Audit & Assurance

Ella specialises in leading large-scale operations in our Managed Services business. She has over a decade of experience in leading complex programs of work underpinned by digital platforms. More recently her technical focus has been on the integration of machine learning and automation into operational environments in the Financial Services sector.

Rachel Sciascia

Rachel Sciascia

Legal Practitioner Director

Rachel is partner in Deloitte Legal in Australia and leads the Australian legal intellectual property practice.  With degrees and years of industry experience in law and science, Rachel has extensive experience in intellectual property, information and communications technology, corporate and commercial law.  Rachel acts for a broad range of clients across large multi-national corporations, government, statutory bodies and public and private companies. Rachel is an expert in drafting, negotiating and advising on arrangements for the development, protection and exploitation of innovations.  Rachel also advises on corporate structures and intercompany arrangements involving the development and exploitation of intangibles, including cross border licensing and transfer.   Rachel has been named in a range of legal lists for her intellectual property expertise.