Reform to the Regime: Protections against unfair contract terms set to be strengthened

In November 2020, the Federal and State Governments' announced their mutual intentions to amend the Unfair Contracts Regime (the Regime) to enhance the protections offered by the current Regime.

 

After a twelve-month investigation, it was found that unfair contract terms continued to be prevalent in standard form contracts despite the existing Regime. The agreed reforms are set to better protect consumers as well as increase thresholds to allow a greater number of businesses and standard form contracts to be covered by the Regime.

The current Unfair Contracts Regime

The Unfair Contracts Regime was introduced over ten years ago and expanded to apply to small businesses in 2016. The purpose of the regime was to address the imbalances between contracting parties to standard form contracts.

A standard form contract is a type of contract that is prepared by one party to the contract only and is typically offered to the other party on a 'take it or leave it' basis with little room for discussion or negotiation. These types of contracts are commonly used by businesses who enter into contracts with a high volume of consumers for largely identical transactions.

The regime currently applies to small businesses, being businesses with 20 employees or less, and individuals only. To receive the protections of the Regime, the upfront price payable pursuant to the contract must also not exceed $300,000 if the term of the contract is for a period less than 12 months, or not exceed $1 million if the contract runs for greater than 1 year.

To learn more about when a term of a contract will be considered unfair, you can read our recent article reporting on the ACCC's commencement of proceedings against Fuji Xerox for the use of unfair contract terms.

Reform to the Regime is announced

In December 2019, the Treasury released a Regulation Impact Statement on Enhancements to Unfair Contract Term Protections. The purpose of a Regulation Impact Statement is to assist the government in considering whether they need to take action to address a specific identified problem.

Following submissions and roundtable consultations with key stakeholders, it was found that despite the current Regime, unfair contract terms continue to be prevalent in standard form contracts with bigger contract-issuing parties capitalising on their stronger bargaining power to ensure the terms remain.

On 6 November 2020, the Treasury confirmed that Commonwealth and state and territory consumer affairs ministers had agreed that amendments are necessary to the Australian Consumer Law (ACL) to strengthen the current protections from unfair contract terms.

As set out in the Regulation Impact Statement for Decision published by the Federal Treasury, the following amendments to the ACL were agreed:


  • unfair contract terms are to become unlawful and courts will be given the power to impose a civil penalty against the contract-issuing party for the contravention;
  • the courts will be provided with more flexible remedies upon finding that a contract term is unfair by having the power to determine an appropriate remedy rather than the term automatically becoming void. For example, the court may instead order that the term be varied;
  • there is to be a rebuttable presumption for unfair contract terms used in similar circumstances, meaning that where a contract term has been found to be unfair, the same or a substantially similar term will be presumed to be unfair each time it has been used by the same entity or in the same industry sector, unless in the circumstances of a specific case, it could be demonstrated otherwise;
  • the remedies available for ‘non-party consumers’ are also to apply to ‘non-party small businesses’;
  • the small business eligibility threshold will be increased to less than 100 employees, and an annual turnover threshold of less than $10 million is to be introduced as an alternative threshold for determining eligibility. This will mean that a business will now be eligible if it employs fewer than 100 employees and/or has an annual turnover of $10 million or less;
  • the requirement for the upfront price payable under a contract to be below a certain threshold in order for the contract to be covered by the Regime is to be removed;
  • the factors a court must consider to determine whether a contract is a standard form contract is to be expanded to include "repeat usage" and further clarity is to be provided as to the types of actions that would and would not constitute "an effective opportunity to negotiate" the contract; and
  • certain clauses that include ‘minimum standards’ or other industry-specific requirements contained in Federal, state or territory legislation are to be exempt from the protections.
It is not yet known when the Treasury will complete the exposure draft legislation, however the changes will be enacted in the ACL, with mirror provisions enacted in the ASIC Act and relevant state and territory acts.

Be proactive

The announcement serves as a timely reminder for businesses to review their standard form contracts to ensure they do not contain any terms that could be deemed to be unfair.

If any terms require amending, businesses should ensure they seek advice to do so before the above amendments are enacted given the Court's ability to order civil penalties for the use of such terms.

McCabe Curwood's Litigation and Dispute Resolution group has experience in advising our clients in relation to their obligations under the Australian Consumer Law, including in relation to unfair contracts, to ensure that you minimise the risk of proceedings being commenced against you.

Contributors

Stephanie Andrews Lawyer