In Brief

On 9 November 2020, the Federal Government published a Decision Regulation Impact Statement (Decision RIS), recommending significant reforms to the unfair contract terms (UCTs) regime in the Australian Consumer Law (ACL).

If passed, the reforms will result in UCT's being illegal and will give Federal Court the power to impose significant penalties for breach. The reforms will also expand the scope of the UCT regime in relation to the definition of small business and will remove the current monetary thresholds for contracts.

The proposed reforms follow a lengthy public consultation process and are intended to address concerns raised by the ACCC and business that the current regime does not have a sufficient deterrent effect and to address ambiguity in the current drafting.

Although no timing has been provided for next steps, Federal Treasury has reported that it will develop exposure draft legislation and stakeholders will have an opportunity to comment on the detail of the reforms.

Background

Standard form contracts are commonly used across a wide variety of industries as an efficient means of doing business, minimising the costs associated with negotiating contracts. Under the ACL, a term in a standard form 'consumer' or 'small business' contract (as defined) will be unfair if it:

  • would cause a significant imbalance in the parties' rights and obligations under the contract;
  • is not reasonably necessary to protect the legitimate interests of the party that will benefit from the term; and
  • would cause detriment to a party if the term were applied or relied on.

Since the UCT protections were expanded in November 2016 to apply to standard form small business contracts, the ACCC has had concerns regarding the effectiveness of the regime including:

  • lack of deterrent effect: UCTs are currently not illegal. In the absence of a risk of penalties, the ACCC considers that the current provisions have not served to deter businesses from including and relying upon UCTs in standard form contracts;
  • ambiguity: around the definition of "small business", as well as the monetary thresholds applying to contracts subject to the provisions. This has led to compliance difficulties, with many businesses unclear as to whether contracts meet the definition of a standard form contract; and
  • ongoing conduct: where enforcement action has resulted in a court declaration that a term in a contract is void for being unfair, the judgment only extends to the specific contract and the same or similar terms may continue to be used in other contracts. Consequently, businesses may have continued to rely on the same UCTs in new contracts with different parties.

Recommended UCT reforms

The Decision RIS recommends a number of key reforms to the UCT regime to address the ACCC's concerns, including to:

  • make UCTs unlawful and give the Court the power to impose civil pecuniary penalties up to the maximum set out under the ACL. This will likely be accompanied by appropriate guidance and education to assist parties to distinguish between terms that may be 'unfair' and those which are reasonably necessary to protect the legitimate interests of the contract-issuing party and would not be considered 'unfair';
  • change the definition of "small business contract" so that a contract is caught by the regime when one of the parties is a business with:​
    • a headcount of less than 100 employees (from the current 20 person limit), not including related bodies corporate; or
    • turnover of less than $10 million annually;

In addition, the contract value threshold requirement will be removed from the definition (from the current $300,000 maximum value, or $1 million for contracts exceeding 12 months);

  • provide greater clarity on the definition of "standard form contract", including "repeat usage" of a contract as one criteria, and to clarify the types of actions which do not constitute an 'effective opportunity to negotiate' including:
    • negotiation of minor amendments to a contract which do not alter the intent and essence of the original term;
    • selecting terms that are preferred from a pre-existing list, rather than having an opportunity to negotiate the substance of the terms; and
    • where a contract-issuing party has only given a small subset of customers an opportunity to negotiate.
  • provide for flexible remedies giving the Court discretion to determine appropriate remedies, including that the term is void or is to be varied, rather than the term being automatically void; and
  • establish a rebuttable presumption that a contract term is unfair if, in a separate case, the same or a substantially similar term has been used by the same entity or in the same industry sector and declared by a court to be unfair. If the term is challenged it will be presumed to be unfair, unless the contract-issuing party is able to produce evidence to demonstrate why it was not unfair in the particular circumstances of the case.

It is intended that the proposals will be applied to small business and consumer contracts for goods, services and the sale or grant of an interest in land. Draft legislation has not yet been released but here is a direct link to the Ministerial press release and you can read more on the Treasury's website, which has copies of the Consumer Affairs (CAF) meeting communique and the Decision Regulation Impact Statement.

Key Takeaways

Once implemented, the reforms will significantly increase the risk to businesses relying on standard form contracts in dealings with consumers and small business trading partners, in particular in relation to the financial penalties that may apply for contraventions. Businesses should be mindful of the proposed new requirements when drafting or entering into standard form contracts and should review existing contracts and relationships to identify any that are likely to be caught by the proposed new regime and that may require amendment.