Revamp of the unfair contract terms regime

A significant revamp of the unfair contract terms (UCT) regime is back on the agenda with the Albanese government tabling draft laws on 28 September 2022.

While the UCT Reform Bill is substantially the same as the lapsed reform Bill from 2021, it proposes significant increases to maximum penalties for competition and consumer law contraventions. The primary aim of the reforms is to deter non-compliant conduct and reduce the financial benefits and incentives for businesses to engage in conduct in breach of competition and consumer law, ensuring a robust level of protection for consumers. Here, lawyer Luke Hefferan explores the proposed new regime.

Key takeaway

With increased penalties and powers, it is expected the Australian Competition and Consumer Commission (ACCC) and ASIC will take a strong approach to enforcing the reforms. Now is the time to review your standard form contracts to ensure they do not contain any unfair contract terms. If they do, you should seek legal advice to ensure those terms are removed or redrafted.

Background

In the November 2021 edition of Fundamental, we flagged reforms to unfair contract laws to provide greater protections for consumers and small businesses entering into standard form contracts. Those reforms were not passed before the 2022 Federal election, and the Bill lapsed when parliament was dissolved.

The Albanese government announced at its first sitting in July 2022 that it would introduce new UCT laws and on 28 September 2022 the UCT Reform Bill was tabled.

The UCT Reform Bill will amend the Competition and Consumer Act, the Australian Consumer Law (ACL), and the Australian Securities and Investments Commission Act (ASIC Act).

What will change if the reforms are passed?

The key changes can be summarised as follows:

Expanded scope

Changes to the definition of ‘small business’ and changes to contract value thresholds mean the UCT protections will apply to more contracts.

Under the ACL (which addresses contracts for goods, services and the sale or grant of an interest in land), a contract will be a small business contract (regardless of the contract value) if at least one party to the contract has less than 100 employees or an annual turnover of less than $10 million.

Under the ASIC Act (which addresses contracts for financial services and products), a contract will be considered a small business contract if—

at least one party to the contract has less than 100 employees or an annual turnover of less than $10 million, and
the upfront price payable under the contract does not exceed $5 million.

Penalties

There are currently no financial penalties for UCTs but they can be determined as being void by a court.

Under the proposed reforms:

UCTs would be unlawful.
A business or individual that proposes, applies, or relies on a UCT will be at risk of serious financial penalties.
Each individual UCT in a contract is considered a separate contravention (so there can be multiple contraventions in relation to the one contract).

Penalties under the ACL:

For individuals, maximum of $2.5 million per contravention.
For corporations, maximum penalties are the greater of—
- $50 million
- if a court can determine the value of the benefit obtained—three times the value of the benefit, or
- if a court cannot determine the benefit obtained—30 percent of the adjusted turnover during the breach turnover period for the act or omission.

Penalties under the ASIC Act:

For individuals: the greater of—
- 50,000 penalty units (currently $11.1 million), or
- if the court can determine the amount of the benefit derived or detriment avoided because of the contravention—the amount x 3.
For corporations: the greater of—
- 50,000 penalty units (currently $11.1 million)
- if the court can determine the amount of the benefit derived or detriment avoided because of the contravention, the amount x 3, or
- 10 percent of annual turnover for the 12 month period ending at the end of the month the corporation contravened, or began to contravene, capped at
  2.5 million penalty units (currently $555 million).

New Powers

The courts will have powers to make more flexible orders to prevent or reduce loss or damage in relation to UCTs and the power to impose monetary penalties.

ASIC and the ACCC will also have additional powers, including to issue notices and seek disqualification orders to prevent a person from managing a corporation.

Are any contracts excluded?

Certain contracts will be excluded from the new UCT regime, including operating rules of licensed financial markets and licensed clearing and settlement systems and certain life insurance contracts.

What is a standard form contract?

The reforms also propose greater clarity in relation to the factors to be considered in determining whether a contract is a standard form contract. A contract may be a standard form contract even if there is opportunity for—

a party to negotiate changes that are minor or insubstantial
a party to select a term from a range of options determined by another party
a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.

Which contracts will the new laws apply to?

The reforms are intended to commence 12 months after the UCT Reform Bill receives assent. This is designed to give business time to prepare and to ensure any standard form contracts are in order. The new laws will apply to:

Contracts entered into after the commencement of the reforms.
Any existing contracts that are renewed after commencement.
A contract term that is varied or added to an existing contract after commencement of the reforms.

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