UCT in the spotlight – Are your contracts fair?

Introduction

The ACCC has set out its priority in cracking down on harmful cancellation terms, in the ACCC’s enforcement and compliance priorities for 2025-26, including those associated with:

• automatic renewals
• termination rights, and
• unilateral variation rights.

This article will provide a refresher of the Unfair Contract Terms (UCT) regime, explain what happens if a term is deemed ‘unfair’, provide guidance on protecting your business with fair contracts and address on how the UCT regime is relevant to franchising due to inherent power imbalances.

Refresher

Under the UCT regime, a term in a standard form contract is unfair if it:

• causes a significant imbalance in the parties’ rights and obligations
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by such a term, and
• would cause detriment to a party if the term were to be applied or relied on.

The UCT regime was expanded in November 2023 by expressly prohibiting businesses from entering into standard form contracts with small businesses or consumers which include UCTs. A contravention of the UCT regime exposes parties to substantial penalties under the Competition and Consumer Act 2010 (ACL) and the Australian Securities and Investments Commission Act 2001 (ASIC Act).

The changes expanded the class of small businesses that can rely on the UCT protections. This now covers businesses that employ fewer than 100 people or have a turnover of less than $10 million.

Under the ASIC Act, the UCT regime will only apply to a small business contract if the upfront price payable (excluding interest) for the contract is $5 million or less. Under the ACL, the monetary contract threshold has been entirely removed.

What happens if a term is declared as unfair?

Individuals can apply to a court to have a term of a standard form contract they entered into declared unfair and accordingly, void. ACL regulators (the ACCC and state and territory consumer protection agencies) can also apply to have a term of a particular standard form contract declared unfair.

If a court or tribunal finds that a term is ‘unfair’, the term will be void – this means it is not binding on the parties and not operative. The rest of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

If a party subsequently seeks to apply or rely on a term that a court has declared unfair, it is a breach of the ACL and the court may grant:

• an injunction restraining the party from acting upon the term
• compensation
• an order to provide redress to non-party consumers or small businesses, and/or
• any other orders the court thinks appropriate.

Franchisees who have a problem, or are currently in dispute, with their franchisor can access mediation through the Australian Small Business and Family Enterprise Ombudsman’s office.

Protecting your business with fair contracts

With substantive penalties that a party may likely be liable for and the ACCC’s highlight on UCT, it is imperative for parties’ to review their standard or proforma contracts periodically.

The primary consideration is: does the term ‘extend beyond protecting the party’s legitimate business interests’.

Businesses should consider whether the terms:

• give one party unilateral rights or broad powers
• unreasonably shift risk, cost or liability to one party, and
• are transparent (i.e. not hidden in fine print or written in a complex and confusing manner).

Terms should:

• be commercially reasonable
• include mutual rights
• be drafted in plain language, and
• include notice requirements.

Specific examples of contract terms that are in the ACCC’s sights are:

• Automatic renewal terms without notice – notice of an impending renewal and a right to terminate for convenience should be incorporated.
• Termination clauses that are imbalanced or provide fees, costs or penalties that exceed genuine loss – termination rights should be mutual.
• Unilateral variation clauses – a customer’s consent should be required and an appropriate notice period should be provided.

Spotlight on automatic renewal clauses

 When updating automatic renewal clauses, the following must be considered:

• make it clear that the agreement contains an automatic renewal clause (at the top of the agreement with a separate reference to the agreement containing an automatic renewal clause, by defining it and terms related to it, and bolding the automatic renewal clause where necessary to draw attention to it)
• provide for a reasonable period of notice in relation to the renewal date (this may be dependent on the term of the agreement)
• set up automatic email reminders so that reminders can be sent to the other party that they have a certain period of time to provide notification that they do not wish to renew the agreement
• provide a renewal period (or further term/s) that does not exceed, or preferably is less than the initial term, and
• make it easy and simple to opt out of the agreement (i.e. whereby a party merely provides written notice to the other party within a certain period of time prior to the end of the relevant term).

It is important to obtain independent legal advice in relation to the fairness of automatic renewal clauses so that the specific facts and circumstance of each agreement is considered, specifically in relation to the reasonableness of various time periods for notice as it is fact dependent.

Franchise agreements

Most franchise agreements are likely to be ‘standard form small business contracts’. With the expansion of the 'small business’ class under the UCT regime, a large proportion of franchisees and master franchisees are likely to be deemed to be a ‘small business’ and protected under the UCT regime.

Prospective franchisees generally have limited or no opportunity to meaningfully negotiate the terms within a franchise agreement. The franchise agreement is core to the relationship between a franchisor and its franchisees. The franchising relationship will inherently create a power imbalance between the franchisor, who seeks to limit and controls the autonomy of the franchisee, and the franchisee who is utilising the benefits of the franchise system which the franchisor is aiming to protect.

The concern lies where the power imbalance is exacerbated when franchisors include or rely on UCT’s in their franchise agreements.

The prevalent issues in franchise agreements include:

1. unilateral variation clauses
2. withholding or setting-off payments
3. audit power clauses
4. restraint of trade clauses, and
5. termination clauses.

Summary

It is important that businesses regularly review standard form contracts to ensure that they do not contravene the UCT regime. Sparke Helmore’s Corporate and Commercial team can provide guidance to ensure compliance with the UCT regime.