Unfair Contract Terms Law Reform – The 3 Key Changes Businesses Need To Watch Out For

Commercial

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DATE PUBLISHED: October 27, 2021

The Federal Government recently released the exposure draft of its Treasury Laws Amendment (Measures for a later sitting) Bill 2021 (Exposure Draft), which seeks to impose significant pecuniary penalties and broaden the range of remedies for breaches of the unfair contract terms (UCT) regime contained in Australia Consumer Law (ACL) and the ASIC Act.

The changes aim to strengthen the current UCT regime to provide greater protection for consumers and small businesses entering into standard form contracts, which are often provided on a 'take it or leave it' basis.


The Current Position

The ACL and, for financial products, the ASIC Act contain provisions which protect consumers and small businesses from unfair terms contained in standard form contracts.

Broadly speaking, a term of a standard form contract will be unfair if:

  • It would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  • It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Currently, where a Court determines that a provision of a standard form contract is 'unfair', the Court can make orders that the relevant provision is void for unfairness. There is no ability for the Court to impose pecuniary penalties on the party seeking to rely on the unfair term.  


What's Changing?

The Exposure Draft contemplates three key changes to the UCT regime:

  • Enforcement rights and significant peculiarly penalties;
  • An expanded definition of what constitutes a ‘small business’ for the purposes of the UCT regime; and
  • A presumption that similar terms in standard form contracts will be unfair.

These key changes are summarised in the paragraphs below.

1

PROPOSAL 1 - ENFORCEMENT AND PENALTIES

The Exposure Draft introduces two new prohibitions:


  • Where a person enters into a relevant contract that contains an unfair term proposed by that person; and
  • Where a person applies or relies on, or purports to apply or rely on, an unfair term contained in a relevant contract.


Each contravention may attract maximum pecuniary penalties of:


  • For businesses - the greater of:
    • $10 million;
    • Three times the value of any benefit from the contravention; and
    • If the value of the benefit cannot be determined, 10% of Australian turnover in the 12 month period prior to the contravention; and
  • For individuals - $500,000.

Additionally, Courts will be able to injunct a person from:


  • Entering future contracts that contain the same or a substantially similar term; and/or
  • Applying or relying on a term in any existing contract with the same or a substantially similar term (whether or not that contract is before the Court).

2

PROPOSAL 2 – EXPANDING SMALL BUSINESSES

The Exposure Draft also proposes to broaden the scope of ‘small businesses' that will receive the benefit of the UCT protections.


A ‘small business’ will be one which:


  • Employs fewer than 100 persons (currently 20 employees); or
  • Has an annual turnover of less than $10 million.


Additionally, the Exposure Draft proposes to remove the upfront dollar value test in relation to the size of a standard form contract (currently $300,000, or $1 million if over 12 months in duration) so that the regime captures an expanded class of small business standard form contracts.

3

PROPOSAL 3 – PRESUMPTION THAT SIMILAR TERMS WILL BE UNFAIR

The Exposure Draft introduces a rebuttable presumption relating to terms that have been declared unfair.

Unless a party can prove otherwise, a contract term will be presumed unfair if the same or a substantially similar term has been held to be unfair in another proceeding in similar circumstances (e.g. proposed by the same person or in the same or similar industry).

This requirement is intended to encourage parties within an industry to undertake a review of their standard form contracts and to amend those contracts where terms have been found by the Courts to be unfair in other contracts.

What Should You Do?

Businesses entering into new contracts or renewing existing standard form contracts for consumers and small businesses should consider reviewing their standard terms and conditions to ensure they avoid the significant pecuniary penalties proposed by the Exposure Draft.

Invitations for public submissions regarding the Exposure Draft closed on 20 September 2021. At this stage, the timing for introducing the proposed amendments is unknown, so we recommend that businesses keep an eye on the draft bill over the coming months.

If you require any assistance or have any questions,  please fill out the enquiry form below and mention this article for an obligation-free appointment.

For more information on the current UCT regime, read our previous article here.

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