Proposed reforms give the unfair contract terms regime much sharper teeth

 What is happening?

• A 2018 federal review of the current unfair contract terms (or UCT) protections concluded that the regime was ‘ineffective in both operation and effect’, including in terms of deterring unfair conduct.
• Last week a Bill to strengthen the unfair contract terms regime was introduced into Federal Parliament and, if passed, will come into effect 12 months following royal assent.[1] 
• The Bill seeks to overhaul the UCT regime by introducing financial penalties, expanding its reach over small business standard form contracts and increasing the range of remedies available to the Court. 

The current regime

The UCT regime applies to standard form consumer and small business contracts.

A ‘standard form’ contract is one which is provided by one party to another on a ‘take it or leave it’ basis, with the receiving party having little or no opportunity to negotiate. ‘Consumer’ contracts are those for supply of goods or services for personal or domestic uses. A ‘small business’ contract is one in which one of the parties is a business with less than 20 employees and the upfront price of the contract is less than $300,000; or less than $1,000,000 (if the contract term exceeds 12 months).

An unfair contract term is one which:

• would cause a significant imbalance in the contracting parties’ rights and obligations;
• are not reasonably necessary to protect the legitimate interests of the party benefitting from the term; and
• would cause detriment to a party if it were applied or relied on.

In making this assessment, a key factor which the court must consider is the extent to which the term is transparent. The transparency of a contract term depends on how it is expressed, presented and whether it is made accessible to the parties that will be affected by it.

Once a term is determined to be ‘unfair’, the current regime deems it void without the need for any other orders to be made. This means that the contract continues to operate as though the unfair term never existed, provided it is still capable of binding the parties. There are no other consequences for unfair terms under the current regime.

Proposed changes

The proposed changes broaden the application of the UCT regime and increase both its protections and its penalties. The key changes are:

 

Key Change	Details
New offences and penalties	Entering into a standard form contract containing an UCT you propose will now attract financial penalties, rather than simply being void if determined by a court.  In addition, if a business or individual proposes, applies or relies on an unfair contract this will be considered a civil offence and penalties will apply. Under the Bill, the maximum pecuniary penalties per contravention for companies are the greater of:  $10,000,000, three times the value of the benefit (if able to be determined), or 10% of annual turnover for the previous 12 months. For individuals involved in the conduct, the maximum penalty will be $500,000
Expanded scope of UCT regime	The definition of a small business is expanded to include parties which: employ less than 100 employees (an increase from 20); or had less than $10,000,000 in annual turnover in the previous income year. Under the CCA there is no longer a value threshold. The UCT regime will apply to all small business contracts.[2] In determining whether a contract is a standard form contract, the Court must consider whether a party has repeatedly used the same or a similar contract. However, a contract may still be considered a standard form contract regardless of whether: the parties had an opportunity to negotiate minor changes; a party selected a term from a defined group or terms; or a party to another contract was given the opportunity to negotiate terms.
Additional remedies	Once a term is declared unfair, courts may make orders to prevent or reduce loss or damage that may be caused by the unfair term. It is no longer necessary to establish that a person has suffered or is likely to suffer loss or damage. Courts may make orders applying to any existing contracts containing terms similar to one declared unfair, regardless of whether all contracts are put before the court. Courts may issue injunctions to stop the use of contracts containing terms similar to one already declared unfair.
Other amendments	The Bill clarified that remedies for non-party consumers will also be applicable to non-party businesses. Certain clauses will be exempt from the unfair contract terms provisions, for example, where those clauses are included in compliance with relevant Commonwealth, state or territory legislation. Certain categories of contracts will be exempt from the unfair contract terms laws, including: the operating rules of licensed financial markets, licensed clearing and settlement facilities; real time gross settlement systems approved as payment; and certain life insurance payments.

What should you do now?

While the Bill provides for a 12 month grace period after assent, given the likely introduction of substantial fines and the broadened scope of the regime, you should immediately:

• identify whether you use template contracts in your business and if so, whether they may constitute a “standard form” contract under the expanded definition;
• determine whether you use these templates with parties that have less than 100 employees or whose annual turnover is less than $10m;
• if you do not know the employee or turnover numbers of these parties, seek written confirmation about these matters to ascertain whether they fall under the small business definition – this should be done annually;  
• review any applicable contracts for terms that are one-way or clearly in your favour and determine whether these terms are reasonably necessary to protect your legitimate interests;
• for any such identified terms seek legal advice as to whether they may be unfair and require amendment.

Our experience in relation to UCTs to date is that the ACCC has taken a strong investigative approach in presuming that any one-way or unilateral type terms are likely to be “unfair”. In line with this approach, the ACCC has effectively required parties to amend terms to the satisfaction of the ACCC. With significant penalties for breaches of the UCT regime, we anticipate that the ACCC will also take a strong approach to prosecution.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).