Understanding the New Unfair Contract Terms Law: A Guide for Australian Startups

The legal landscape for Australian startups has shifted significantly with the introduction of new Unfair Contract Terms (UCT) laws that came into effect on November 9, 2023. For founders, understanding and adapting to these changes isn’t just about compliance—it’s a strategic business imperative.

What’s the Point?

Protections from unfair contract terms apply to standard form contracts and small business contracts. They exist to protect consumers from businesses, and small businesses from larger businesses – this prevents the party preparing the contract exploting a party with a weaker bargaining position.

What’s Changed?

Previously, the risk of utilising unfair terms was relatively contained—a term could be voided, but no further penalties would apply. Now, with the reforms, each unfair term used could attract severe financial penalties per infringement. The scope of contracts falling under these laws has broadened, and the courts have been empowered with greater discretion and severity in enforcement. Here is an overview of the changes:

Startups at the Crossroads

In the digital age, where terms and conditions can be the bedrock of user agreements, startups are particularly vulnerable to the perils of UCTs. Commonly used digital contracts, such as click-wrap agreements for software services or online platforms, could now be potential liabilities. Such standard agreements must be crafted with a fair balance to avoid being construed as ‘unfair’ under the new definitions.

Many startups, often resource-strapped and seeking efficient solutions, opt for off-the-shelf legal templates. These templates, while convenient, may not be updated to reflect current laws, leaving the startup exposed to the risks of non-compliance. The new UCT laws emphasize the perils of a ‘copy-paste’ approach to legal documents, demanding a more bespoke strategy.

Contracts to Watch

Startups commonly engage in various contractual relationships that could be affected by the new UCT laws. Here’s a closer look at some key contract types:

1. SaaS Agreements: Software as a Service (SaaS) agreements are vital for startups offering cloud-based applications. These agreements must strike a balance between protecting the provider’s rights and not imposing unfair terms on the user. A SaaS agreement that is too restrictive can deter potential users, while one that is too lenient may not sufficiently protect the business. For instance, terms that allow for arbitrary service changes without notice or cause could be considered unfair. Startups must ensure their SaaS contracts are designed to be transparent, especially regarding data ownership, service level agreements, and termination clauses.
2. Supplier and Distribution Agreements: Startups often enter into supplier and distribution agreements to secure essential resources and market presence. These agreements typically outline terms for supply, delivery, pricing, and payment. The UCT law changes compel a re-evaluation of any clauses that may disproportionately bind one party over another—like punitive late payment fees or inflexible supply quantities that don’t account for the ebb and flow of startup business cycles. Ensuring these contracts are reciprocal in obligation and benefit is crucial to prevent them from being flagged as unfair.
3. Licensing Agreements: Licensing agreements are the backbone of many startups that rely on intellectual property (IP) as a core asset. These contracts must articulate the rights and obligations of the licensor and licensee without overreaching. For example, a licensing agreement that imposes excessive royalties or contains overly broad or ambiguous IP definitions may now fall under scrutiny. The licensing terms should be tailored to the specific use case and provide a clear framework for how the IP can be used, ensuring both parties benefit equitably from the arrangement.
4. Online Marketplace Terms: Online marketplaces have to balance the interests of various stakeholders: buyers, sellers, and the platform itself. The terms that govern these platforms must be crafted to ensure this balance is maintained. A term that allows the marketplace to unilaterally change commission rates or delist a seller without proper process could be seen as creating a significant imbalance in the parties’ rights and obligations. Marketplaces should aim for terms that protect their operational interests while also being considerate of the rights of users to ensure a fair and competitive environment.

Red Flag Clauses

Specific examples of UCTs arising out of recent case law include the following (the below is non-exhaustive):

• The contract automatically renews unless the customer gives notice of its intention to not renew;
• One party has the right to vary the contract without seeking permission from the other party;
• One party can terminate the contract for any reason and the other party cannot;
• Disproportionate limitations of liability or liability caps;
• Incorporation of other documents which do not form part of the main contract;
• Ability for one party to increase the fees payable by the other party.

Steps for Founders

Founders should take steps as soon as possible to ensure they’re startup is protected from UCT risks. As a starting point, we recommend that you:

1. Audit all existing standard form contracts for potential UCTs. With the increased risk of substantial penalties, this step cannot be overstated.
2. Collaborate with lawyers who understand the startup ecosystem and can navigate the complexities of the UCT laws to ensure contracts are robust and compliant.
3. As your business evolves, so too should its legal frameworks. Regular updates to contracts will help mitigate risks as the business grows.

Get in Touch

Our Melbourne-based commercial law firm specializes in guiding startups through these and other legal challenges. We understand the nuances of startup operations and can provide tailored legal solutions to protect your interests and facilitate your growth ambitions.

Now is the time for action. Secure your startup’s future by ensuring your contracts reflect the fairness and compliance required by the new UCT laws. If you do, or think you might, use standard form contracts in the course of your business, reach out for an obligation free consultation by calling us on 03 8691 3111 or sending us an email at hello@alliedlegal.com.au.