Reforms and penalties on the way for unfair contract terms

5 minute read  25.08.2021 Stella Luo, Paul Schoff

Proposed unfair contract term reforms include the introduction of penalties for reliance on an unfair term and an expansion of the UCT regime's scope. We explore what this could mean for businesses.

 


Key takeouts


  • Treasury has released an exposure draft bill (the Bill) proposing to strengthen and expand the unfair contract terms (UCT) regime.
  • The proposed reforms will empower courts to impose civil penalties for proposing, applying or relying on a UCT, provide more flexible remedies in response to a contravention of the UCT regime, and expand protections under the regime.
  • Businesses should review their standard form contracts for UCTs.

On 23 August 2021, Treasury released a draft Bill to amend the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Australian Consumer Law under Schedule 2 of the Competition and Consumer Act 2010 (Cth) (ACL).

The Bill proposes:

  • the introduction of civil penalties for proposing, applying or relying on an unfair contract term. Currently, a term in a standard form contract found to be unfair is only deemed void. If passed, courts will be able to impose a civil penalty of up to $500,000 for individuals, or for corporations the greater of $10 million, three times the value of the benefit derived from the contravention, or 10% of annual turnover; and
  • the application of UCT protections to a much broader range of businesses, covering standard form contracts where at least one party either employs fewer than 100 persons (as opposed to the current threshold of 20 employees) or has an annual turnover of less than $10 million.

The unfair contract term regime has been with us in one form or another for more than a decade. In 2016 the regime was extended to small business contracts. Earlier this year it was extended to apply to insurance contracts. The scope of its application to small business contracts is set to grow and the regime will be made tougher with the introduction of civil penalties if new legislation is passed.

Proposed changes to the UCT regime

In addition to key changes introducing civil penalties and extending the application of UCT protections to standard form contracts with a much broader range of businesses, the Bill proposes several other amendments to the UCT regime, including to:

  • Empower courts to impose more flexible remedies as considered appropriate by the court (as opposed to the term merely being automatically void);
  • Create a rebuttable presumption that a term is unfair if it is subsequently included in relevant contracts in similar circumstances as another term that has been found to be unfair;
  • Clarify that the remedies available for ‘non-party consumers’ also apply to ‘non-party small businesses';
  • Repeal the ‘upfront price payable’ requirement under the definition of ‘small business contract’. This means that the UCT regime will apply regardless of the amount of upfront price payable under the contract;
  • Clarify what constitutes a ‘standard form contract’ under the UCT regime. For example, courts must take into account whether a party has entered into another contract prepared on substantially similar terms, and how many contracts that party has entered into. It also requires businesses to consider whether a party was given an effective opportunity to negotiate the terms of the contract, and must not take into account:
    • an opportunity for a party to negotiate minor or insubstantial changes to terms of the contract;
    • an opportunity for a party to select a term from a range of options determined by another party; or
    • the extent to which a party to another contract or proposed contract was given an effective opportunity to negotiate terms of the other contract or proposed contract;
  • Exempt terms that are taken to be included in a contract by operation of law from the UCT regime;
  • Streamline the court’s power to make orders to void, vary or refuse to enforce part or all of a contract or collateral arrangement;
  • Clarify that courts can make orders applying to any existing consumer or small business standard form contracts entered into by a respondent that contains an unfair contract term that is the same or substantially similar to a term the court has declared to be an unfair contract term. This is whether or not that contract is put before the court; and
  • Clarify that courts can issue injunctions against a respondent with respect to existing or future consumer or small business standard form contracts containing a term that is the same (or substantially the same) as a term the court has declared to be an unfair contract term.

The Bill retains the current automatic voiding provisions under the UCT regime (without the need for further action or orders to be made).

What the changes mean for businesses

These changes, if passed, will affect a wide range of industries and sectors, in particular, those that regularly deal with consumers and small to medium-sized businesses and use standard form contracts.

The proposed changes will significantly impact the risks associated with using standard form contracts. They expand the range of contracts to which the regime will apply. They also impose a civil penalty for the inclusion of an unfair term in a standard form contract.

Businesses need to assess the risk in their standard form contracts. In the future, if the proposed changes are passed, some will fall within the expanded UCT regime that have not previously been covered. The potential downside of proposing, applying or relying on an unfair term will increase if that conduct becomes subject to penalty.

View further information on the Bill, including a copy of the Bill and draft Explanatory Materials.

We can assist with:

  • Reviewing standard form contracts and terms & conditions: to ensure that they do not contain UCTs, and remediating them if necessary;
  • Conducting UCT regime compliance training: to ensure that businesses understand their obligations under the UCT regime and assist businesses to develop processes to avoid including UCTs in existing and future standard form contracts; and
  • Preparing a submission to Treasury under the Bill's public consultation process.

Please get in touch with us if you have any questions or would like assistance with navigating the proposed changes to the UCT regime.

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https://www.minterellison.com/articles/reforms-and-penalties-on-the-way-for-unfair-contract-terms

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