The revised Unfair Contract Terms (UCT) laws for small businesses took effect on 9 November 2023. As of this date, unfair terms in standard form contracts are prohibited, with penalties applicable for non-compliance.
Changes to the law on UCT will:
- Expand protections for small businesses (100 or fewer employees, or with annual turnover under $10 million).
- Apply to standard form contracts made or renewed on or after this date, or if any terms are varied or added after 9 November.
- Introduce penalties for breaches of the unfair contract term provisions.
To ensure compliance with these regulations, it is important to note that the Government regularly engages and contracts small businesses for a range of services. These contracts and terms of engagement generally fall within the category of standard form contracts. Additionally, understanding the definition of a small business under the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (the Act) is critical, as the reforms significantly impact government procurement practices, particularly when engaging with small businesses.
Why Is This Important for Government Procurement?
The Government frequently utilises standard contract templates to streamline its procurement processes. The Template Conditions of Offer and Conditions of Contract are widely employed across numerous tenders and agreements. Given their standardised and repetitive nature, these contractual terms are highly likely to be classified as standard form contracts under the Australian Consumer Law (ACL).
Under Section 27(2) of the ACL, courts consider various factors when determining whether a contract is standard form, including:
- Whether one party (such as the government) holds most or all of the negotiating power.
- Whether the contract was drafted before any discussions with the counterparty.
- Whether the counterparty had little to no ability to negotiate contract terms.
- Whether the contract accounts for the counterparty’s unique characteristics or the specific transaction details.
Essentially, these mandatory considerations reflect the expectation that a standard form contract has been prepared by one party for repeat use and is presented to the other on a “take it or leave it” basis. If a contract is deemed standard form and contains unfair terms, those provisions may be considered void and unenforceable, exposing the Government to legal and reputational risks.
Is Limited Negotiation Enough to Avoid Unfair Contract Terms Issues?
Not necessarily. The Act clarifies that minimal or insubstantial negotiations do not automatically exempt a contract from being classified as standard form. For example:
- Providing a small selection of pre-set options does not constitute meaningful negotiation.
- Allowing modifications to minor clauses while keeping critical liability terms unchanged does not eliminate unfair contract terms risk.
- Granting negotiation opportunities for one contract does not extend to future contracts unless explicitly addressed.
Implications for Government Procurement
Government agencies must carefully review their procurement frameworks to ensure compliance with the new unfair contract terms rules. Failure to do so could lead to contracts being deemed unenforceable. This can result in loss of credibility, issues during procurement processes, delays in the delivery of goods/services, and potential legal challenges from small business suppliers.
It is essential for the Government to revise its current processes to account for the additional time required for negotiations when engaging small businesses during procurement. This adjustment will ensure that the standard form contract undergoes the necessary review to adequately address the interests of both parties.
Steps to Reduce Risk
By proactively addressing these risks, the Government can enhance compliance and maintain fair procurement practices consistent with the ACL. Steps to reduce risk may include:
- Seeking legal advice and conducting a thorough review of the Template Conditions of Offer and Conditions of Contract to identify and amend any potentially unfair terms.
- Allowing genuine and substantial negotiation opportunities throughout a procurement process, particularly for small business suppliers.
- Ensuring contractual terms are transparent, balanced, and do not disproportionately disadvantage one party.
How Has This Issue Been Determined in Court?
To see how this issue has been determined in Court, consider the recent case of AIBI Holdings Pty Ltd v Virtual Technology Services Pty Ltd [2022] FCA 696, where the Court considered whether a contract was a standard form contract. The Court decided that while standard form contracts are usually based on pre-established terms used repeatedly for the supply of goods or services, contracts with some customisation can still be considered standard form contracts.
For example, agency, distribution, or procurement agreements, even with some negotiation, may still be treated as standard form contracts if the intent is to minimise negotiation or changes. To assess whether a contract qualifies as a standard form contract, it should be evaluated according to the criteria in section 27(2) of the Australian Consumer Law (ACL). If there’s a risk that a contract might be classified as a standard form contract, any unfair terms should be removed.
