The Unfair Contract Terms (UCT) regime commenced on 12 November 2016. Australia will be the only jurisdiction in the world applying this type of regime to business to business contracts. To date, various publications and guides have considered the general impact of UCT regime on standard form small business contracts. However, while many standard form contracts are expressly considered in those materials, little commentary exists in relation to contracts used by IT businesses, including online terms and click wrap agreements.
While the ACCC have identified the telecommunications industry as one of the industries that it will initially focus on, it remains to be seen as to whether ancillary services provided by IT businesses will be included in this focus.
Standard form contracts
IT businesses, be they vendors, consultants, designers, manufacturers or resellers, generally provide their goods or services by way of standard agreements which they prepare with fixed or ‘non-negotiable’ terms. Website design agreements, software development agreements, procurement agreements and managed software or services agreements are prime examples of standard form contracts with widespread use.
Some relevant questions in determining whether a contract is standard form are:
- Did one party have more bargaining power?
- When was the contract prepared?
- Was there effective opportunity to negotiate the terms?
- Is the contract customised to the specific characteristics of the transaction?
It should be noted that a contract is presumed standard form unless it is proven otherwise. Negotiations of price or subject matter of the contract do not count for determining if the contract is standard form – any negotiation must go beyond these matters.
Suppliers and customers
A standard form contract will fall under the UCT regime where a party employs less than 20 persons (Small Business). A party may extend from a contractor, to a partnership and other trading entities. This threshold is calculated on a per head basis for full and part time employees, with casual employees considered where their employment is regular.
A standard form contract will fall under the UCT regime where the upfront price of the contract is less than $300,000 in a year or $1,000,000 if for more than a year (Contract Price). These thresholds will cover a great majority of contracts that many businesses enter into in any given year with Small Business. The Contract Price represents the amount which is certain and ascertainable at the time of entry into the contract. This may have consequences in supply agreements that are scalable, such as user licenced or SAAS and PAAS solutions where the initial amount of the Contract Price may be under the threshold, but there is scope for the service or products to increase as the solution is required to scale.
Problematic unfair terms
The UCT regime identifies the following ‘grey list’ of terms that may be considered unfair, namely terms that:
- avoid or limit performance of the contract;
- permit unilateral termination;
- permit penalties for breach or termination;
- permit unilateral variation of terms;
- permit unilateral renewal or non-renewal of a contract;
- vary the upfront price payable without permitting termination;
- vary the characteristics of the goods or services supplied;
- permit unilateral determination of whether a contract has been breached;
- limit one party’s vicarious liability for its agents;
- permit unilateral assignment of the contract to the detriment of another party without that other party’s consent;
- limit one party’s right to sue another party;
- limit the evidence one party can adduce in proceedings relating to the contract;
- impose the evidential burden on one party in proceedings relating to the contract; or
- are of a kind prescribed by the regulations.
For example, a statement like “to the maximum extent permitted by law, the Supplier’s liability for all claims, actions, charges, costs expenses, losses, damages and other liabilities arising out of or in connection with this agreement whether in contract or in tort including negligence, shall be limited to the amount of fees paid to the Supplier under this agreement” will be severed unless the supplier could show that the term was reasonably necessary to protect their interests – which is a question of fact.
In issuing, entering into or varying a standard form contract after 12 November 2016, IT business and their customers must consider the implications of the UCT regime. Where you supply (or receive) goods or services for the Contract Price under a standard form contract and the recipient (or supplier) is a Small Business then the UCT regime will apply to that standard form contract. Where a term is deemed be unfair, that term will be void and therefore not binding as part of the contract. Therefore problematic terms under the UCT regime must be either minimised or limited to terms which are required to protect a legitimate interest.
This article was written by Brendon Noney, Partner and David Andrews, Associate.