Navigating the expanded unfair contracts regime within Council Procurement

Written by Joshua Brown, Counsel & Compliance Manager  - Local Buy

To any procurement and contracts professionals, the term ‘unfair contracts’ should not be a foreign term, and with a major shake-up to Australia’s unfair contracts regime looming on the horizon, time is of the essence for councils to ensure that their standard form contracts are compliant.

What is changing:

Effective from the 9th November 2023, changes to Australian Consumer Law (ACL) is set to tighten the prohibition of businesses (including local government councils) from proposing, using or relying on ‘unfair contract terms’ (UCTs). These amendments are aimed at protecting consumers and ‘small businesses’ from UCTs. UCTs certainly are not a legislatively new concept, however, as the ACCC Deputy Chair Mick Keogh states:

“There was previously little motivation for businesses to comply with the law, despite the ACCC’s compliance and enforcement action. We strongly urge businesses to review their contracts now to ensure that they comply.”

As per the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth), on 9th November 2023, councils will contravene the Competition and Consumer Act 2010 (Cth) if:

1. It makes a contract; and
2. The contract is a consumer contract or a small business contract; and
3. The contract is a standard form contract; and
4. The term of the contract is ‘unfair’; and
5. It proposed the unfair term.

There is a lot to unpack with this amendment to the ACL alone, especially given the revisions to what is meant by “small business contracts” and “standard form contracts”.

What is meant by ‘unfair contract terms’:

Contracts may be indicatively considered ‘unfair’ if the term/s of a contract:

• Cause significant imbalance in rights and obligations of the parties under the contract.
• Are not reasonably necessary to protect the legitimate interests of the party who receives the benefit of the term.
• Would cause financial harm or otherwise to the other party if enforced.

See also section 25 of the ACL, which provides specific examples of what may constitute an UCT. The courts are the ultimate arbitrators as to whether a term is unfair or not and will take into consideration any matters it considers relevant in its determination.

Changes to the meaning of ‘small business contracts’ and ‘standard form contracts’

In order for a contract to be captured by the UCT regime, it needs to be ‘unfair’ and classified as either a “small business contract” or “consumer contract”. For the purposes of this article, we will be focusing on what will be considered under the ACL to be a “small business contract” from the 9th November 2023, given its applicability to most (but not all) council procurement.

The following outlines the current vs. new definition of a “small business contract”:

Current Definition of 'Small Business Contract'

(a)    The contract is a supply of goods or services, or a sale or grant of interest in land; and
(b)    At the time the contract was entered into, at least one party to the contract is has fewer than 20 persons; and
(c)    Either of the following applies:

1. the upfront price payable in the contract does not exceed $300,000; or
2. the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1 million dollars.

New definition 'Small Business Contract'
(w.e.f. 9th November 2023) 

‘Small Business Contracts’ is where:

(a)    The contract is a supply of goods or services, or a sale or grant of interest in land; and
(b)    At least one party to the contract satisfies either or both of the following conditions:

1. A business has fewer than 100 persons; or
2. A party’s turnover in the previous income year is less than $10 million dollars.

This new definition of a ‘small business contract’ greatly broadens the scope of contracts that fall within the UCT regime.

Next, it is important to consider whether the contract in question is a ‘standard form contract’. Unfortunately, there is no blanket application to determine whether a contract is a ‘standard form contract’ or not, however there are several factors that must be taken into account by the court under section 27(2) of the ACL, including:

1. whether one of the parties has all or most of the bargaining power relating to the transaction;
2. whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
3. whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
4. whether another party was given an effective opportunity to negotiate the terms of the contract.
5. whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.
6. any other matter prescribed by the regulations.

In addition to the existing section 27 of the ACL, the upcoming UCT regime qualifies that a contract may be a “standard form contract” within the meaning of section 27, despite the existence of any one of the following:

1. An opportunity for a party to negotiate changes, to terms of the contract, that are minor or insubstantial in effect; and/or
2. An opportunity for a party to select a term from a range of options determined by another party; and/or
3. An opportunity for a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

It is important for council’s to understand the wide implications of these changes to understand which contracts may be impacted by the incoming UCT regime.

Increased penalties to parties attempting to enforce and rely on UCTs:

Up until recently, where a business relies on an UCT/s, the only tangible legal consequence was that the UCT in question being declared as null and void by a court of competent jurisdiction. This is in stark contrast to the new penalties set to take effect from 9th November 2023. For entities that that make a contract with, or apply, rely or purport to rely on UCTs, the maximum penalties are increased to the greater of:

1. $50 million dollars; or
2. 3x the value of the benefit obtained; or
3. Of the value cannot be obtained, 30% of the adjusted turnover during the breach turnover period for the office, act or omission.

ACCC Deputy Chair Mick Keogh stated that these changes should “motivate businesses to take steps to ensure that their standard form contracts are fair, including by removing or amending concerning terms”.

What next:

In order to ensure that your organisation is compliant with the incoming UCT regime, the ACCC provides some useful guidance on what to consider when reviewing whether a contract contains UCT/s:

1. Consider both points of view (not just your organisation’s perspective).
2. Include counter balancing terms.
3. Avoid terms that are unnecessarily broad.
4. Ensure that none of your terms either intentionally (or unintentionally) conflict with the Australian Consumer Law, or any other law.
5. Ensure that your contracts are written in plain English.
6. Take steps to ensure transparency.

If you believe your standard form contracts (whether they be ‘small business contracts or ‘consumer’ contracts) contain any UCT/s, it is important to ensure that these are promptly addressed prior to 9th November. If in doubt, it is recommended that council obtain independent professional advice.

Local Buy Contracts:

Are you aware that Local Buy has developed default contract conditions that have been reviewed and accepted by all pre-qualified suppliers? We've taken every precaution to ensure these contract conditions adhere to principles of fairness, balance, and reason. Furthermore, all Local Buy suppliers retain the option to engage in negotiations, ensuring flexibility where necessary. Should you require clarification or seek detailed information on how your council can effectively leverage these contract terms to minimise risk and expedite negotiations, we invite you to contact us. We're here to provide the necessary assistance and insights you require.

Disclaimer: Please note that this article does not constitute legal advice and intended to provide general information only. Before any degree of reliance is placed on this article, it is recommended that independent professional advice is obtained.