The Federal Government’s draft Bill proposing reforms to unfair contract terms (UCTs) means businesses should review their standard form contracts for UCTs.

The reforms seek to clarify and strengthen the existing UCT regime to provide greater protection for consumers and small businesses entering standard form contracts. In this article, lawyers Luke Hefferan and Sarah Sherman set out the key changes you need to be aware of.

THE CURRENT REGIME

The UCT regime under the Australian Consumer Law (ACL) and, for financial products, the Australian Securities and Investments Commission Act (ASIC Act) protects consumers and small businesses from UCTs in standard form contracts, consumer contracts or small business contracts.

A standard form contract is a contract prepared by one party before they engage with the other party; prepared by the party with the most power in the relationship (usually the seller or supplier); and is not usually negotiated before it is signed. These contracts are often referred to as ‘take it or leave it’ contracts.

There is no definition of ‘standard form contract’. ‘Consumer contract’ and ‘small business contract’ are defined in the applicable legislation.

Generally, a contract term will be unfair if it—

• would cause a significant imbalance to the parties’ rights and obligations under the contract
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term, and
• would cause detriment to a party if the term was applied or relied upon.

Examples of an unfair term include—

• a unilateral right to vary the terms of the contract (such as the price)
• a term allowing one party to terminate the contract, but not the other
• an automatic renewal clause
• a broad limitation of liability clause favouring one party.

There is no one definitive example of a UCT. Whether a term is unfair depends on the context of the contract and the relevant position of the parties.

CASE EXAMPLES

Here are some recent examples of terms which have been deemed a UCT by the courts:

• A ‘class action waiver’ clause was deemed unfair because—
  • it was not sufficiently transparent to consumers on entering the contract, and
  • it limited the litigation options open to consumers in the event of a breach of contract or consumer guarantees.
• Some terms contained within a standard form finance contract were found to enable the bank to unilaterally vary the terms and conditions of the contract without giving the borrower advance notice or an opportunity to exit the contract without penalty.

THE PROPOSED CHANGES

Enforcement and remedies

Under the existing regime, if a court or tribunal deems a term unfair, the relevant provision can be held void for unfairness. However, there is currently no ability to impose monetary penalties on the party seeking to rely on the UCT. The reforms seek to amend this by introducing penalties of up to $500,000 for individuals, sole traders and partnerships. For businesses, the maximum penalties, if the proposed changes are passed, are the greater of—

• $10 million
• three times the cause of any benefit from the contravention, or
• if the value of the benefit cannot be determined, 10 percent of the company’s turnover in the 12-month period to the contravention.

If a person attempts to enter future contracts containing the same or a substantially similar term, and/or apply the same or substantially similar term in an existing contract, which has previously been deemed a UCT, there will be a rebuttable presumption the term is void. Then, the contracting party will need to prove it is not unfair. This is intended to encourage parties to undertake a review of their standard form contracts and amend terms which the courts have said are unfair.

The reforms also introduce more flexible remedies for disadvantaged parties, including the express power to void, vary or refuse to enforce part or all of a contract, and the making of any order the court thinks appropriate to prevent or reduce loss or damage that may be caused. These remedies are not otherwise available for breaches under the ACL and ASIC Act.

Small business threshold and small business contract changes

The definition of ‘small business contract’ will also change if the Bill passes, which means many more contracts will be considered small business contracts.

The reforms seek to expand the scope of the UCT regime by increasing the threshold for small business contracts to capture businesses with fewer than 100 employees (increased from the 20-employee threshold) or those with an annual turnover below $10 million (currently, there is no equivalent threshold). This will increase the number of suppliers and consumers caught by the regime.

There will be no limits on the upfront price payable under contracts (currently, it is $300,000 for a term of less than one year and $1 million for contracts with terms of more than 12 months).

Clarified application

Finally, the reforms set out a list of factors the court ‘must’ and ‘must not’ consider when determining whether a party was given an effective opportunity to negotiate a contract. Factors the court must consider include—

• the relative bargaining power of the parties
• whether the contract was prepared by one party prior to any discussion between the parties
• whether a party was required to accept or reject the terms in the form they were presented, and
• whether the contract takes into account the specific characteristics of the particular transaction.

The court must not consider any negotiations as to minor or insubstantial changes to the contract, or any opportunity for a party to select a term from a range of options determined by another party.

WHAT DOES IT MEAN FOR BUSINESS?

Public consultation on the draft bill closed on 20 September 2021. The timing for introducing the draft bill to Parliament is currently unknown. However, if the changes come into force, they will apply to standard form contracts entered into at or after the commencement date, as well as those existing contracts renewed or varied at or after the commencement date.

It is anticipated regulators, such as ASIC and the ACCC, will seek to make an example of offending parties once the changes are in effect. Any business which uses standard form contracts should take the opportunity to review their terms ahead of changes to the UCT law commencing.