Reforms to the Unfair Contract Terms Regime

OVERVIEW

On 9 February 2022, a new Bill^[1] was introduced into the House of Representatives to introduce a civil penalty regime prohibiting the use and reliance on unfair contract terms in standard form contracts; and greatly expand the range of businesses covered by the unfair contract terms (UCT) provisions. If passed by both houses of Parliament:

• Businesses who employ less than 100 employees or have a turnover under $10 million will be protected by the UCT regime;
• Courts will be given the power to impose significant civil penalties where unfair terms are used;
• Courts will be given a greater range of options in the remedies that can be applied;
• Organisations will be given a transition period of 12 months to make the necessary adjustments to their standard form contracts.

THE UNFAIR CONTRACT TERMS REGIME

The UCT protections contained in the Australian Consumer Law (ACL) was brought into effect on 12 November 2016 and currently have the effect that any term found to be unfair under s 24 of the ACL terms is void and unenforceable. For a term to be unfair a Court has to determine if

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• 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.

Some examples of terms that have previously been found to be unfair include clauses that provide for:

1. automatic renewals unless the customer cancels the contract within a certain time frame;
2. unilaterally increases to prices;
3. unilateral alteration of terms;
4. imposition of liability regardless of whether the customer was at fault;
5. very wide or unlimited indemnities that do not consider how the damage arose, and whether the respective party could have avoided, should have avoided or mitigated its losses;
6. rights granting only one party the right to terminate the agreement particularly where the other party’s rights to terminate are limited; and
7. combinations of unfair terms such as automatic renewals together with the ability to unilaterally raise prices after the renewed term has been locked in
8. unilateral rights to terminate the contract based on a unilateral discretion as to whether there has been a breach of the contract followed by the imposition of penalty like consequences on the customer; or
9. the retention of security deposits where the owner of the funds does not make a request for its return.

PROPOSED CHANGES

Introduction of civil penalties

The changes proposed in the Bill are wide-ranging; however, the biggest change is the introduction of civil penalties for proposing, applying or relying on an unfair contract term. As is noted above the current position is that if a term in a standard form contract is unfair it is only deemed to be void. This has led to many instances of parties either not worrying about redrafting such terms to ensure compliance or purposefully drafting their terms on the basis that it is better for potentially unfair terms to be left in the contract given ultimately the decision as to whether a term is unfair is for the Courts to decide and the only risk of keeping the clause is that it may be unenforceable. This will all change with the introduction of civil penalties as the Court will be able to impose penalties of up to:

1. $500,000 for individuals; or
2. for corporations the greater of:
   1. $10 million,
   2. three times the value of the benefit derived from the contravention; or
   3. 10% of annual turnover,

where a party proposes, applies or relies on an unfair contract term. Additionally, each term found to be unfair will be considered a separate contravention of s 23(2A) of the ACL. Accordingly, whilst the decision as to whether a term is unfair or not still rests with the Court, the risks posed by the potential civil penalties will further deter businesses and their advisor’s implementing clauses that could potentially be unfair.

Expansion to cover more businesses

The proposals if passed will see the UCT protections being extended to a broader range of businesses with the effect that, businesses will be covered if they either:

• employ fewer than 100 persons (as opposed to the current threshold of 20 employees); or
• have a turnover for the last financial year that was less than $10,000,000.

The contract price threshold (currently at $300,000 or$1,000,000 if the contract is for longer than 12 months) will be removed under the proposed changes. The only exception to this is that certain small business financial products or services contracts will retain a threshold albeit this will be increased to $5,000,000.

Clarification of standard form contracts

Amendments will also be made to further clarify what constitutes a standard form contract by specifying that:

• courts must take into account whether one of the parties has made another contract in the same or substantially similar terms, and if so, how many such contracts that party has made;
• a contract may still be determined to be a standard form contract regardless of whether a party has had an opportunity to:
  • negotiate changes to terms of the contract that are minor or insubstantial in effect;
  • select a term from a range of options determined by another party; or
  • negotiate terms of another contract or proposed contract.

Further clarification is also provided that terms that are imposed into contracts by law (such as may be the case with franchise agreements or retail shop leases) cannot be considered to be unfair terms.

Remedies and court powers

The proposed amendments also seek to:

• allow the Court to have regard to the conduct of the parties to the proceeding since the contravention occurred or the declaration that the term is unfair was made;
• make it clear that the Courts can make any orders (including injunctions) it considers appropriate.
• clarify that the Courts, on application by the regulator, can make orders against a respondent concerning standard form contracts (existing or in the future) which may contain a term substantially similar in effect to a term the Court has previously declared to be an unfair contract term. This is whether or not that future or an existing contract is identifiable when the order is made.

The amendments also make it clear for cases where the ACCC makes an application, the remedies for breaches of a wide range of sections in the ACL (not just the UCT protections) are available equally to all persons (not just consumers) who were not a party to the enforcement proceedings and who may suffer loss or damage as a result of a contravention.

What you need to do

Whilst it is likely that the Bill will undergo further amendments and if passed the proposed changes will not apply immediately it is important that all businesses ensure that their contracts with small businesses and in particular any standard form contracts in use are reviewed by a lawyer to ensure:

1. that any potentially unfair contract terms are identified and redrafted to ensure compliance;
2. that the risks of being subjected to a penalty for proposing, applying or relying on an unfair term are reduced or eliminated; and
3. that the business understands what types of the term are likely to be found to be unfair and the risks they are taking on if they propose, use or rely on such unfair terms.

[1] Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022.