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Reform path clear – Treasury releases unfair contract terms exposure draft legislation

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This article was written by Grace Saltearn, Taylor Macdonald, Tamara Hunter and Peta Stevenson

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Introduction

Refresher: What is an "unfair contract term"?

Background to the reform

Take me straight to the detail of the key changes!

What should I do?

The Exposure Draft Legislation for the Treasury Laws Amendment (Measures for a Later Sitting) Bill 2021 (UCT Exposure Draft Legislation) has been released, proposing significant pecuniary penalties and a broader range of remedies for individual breaches of the Unfair Contract Terms (UCT) provisions contained in the Australian Consumer Law (ACL) and ASIC Act. The UCT Exposure Draft Legislation is open for public consultation until 20 September 2021, although an indicative timeframe for the introduction of these proposed amendments has not yet been released.

The key proposed amendments:

  • Introduce significant pecuniary penalties for each individual contravention of the prohibition on proposing, applying or relying on a UCT provision in a standard form contract, meaning businesses could face multiple penalties for various breaches of the three separate prohibitions. This will result in businesses being subject to the same penalty regime as for other contraventions of the ACL (and ASIC Act, as applicable),
  • Introduce a rebuttable presumption that that the inclusion of a term that is the same as, or is substantially similar in effect to terms that have been found to be unfair, are also unfair. This means that similar terms will be prohibited from being used in subsequent contracts (unless proven not to be unfair in the subsequent case);
  • Introduce more flexible remedies by empowering courts to order additional remedies that are not available for other breaches of the ACL and ASIC Act (including further injunctive powers in some instances) once a term has been declared unfair, whilst retaining the automatic voiding provisions which apply to unfair terms;
  • Expand the class of small business contracts that are covered by the regime by increasing the small business definition thresholds and removing the upfront contract value threshold, meaning the regime will capture a broader range of dealings; and
  • Clarify certain elements of the regime, including setting out what the court may and may not consider when determining whether a party was given an effective opportunity to negotiate a contract.

Refresher: What is an "unfair contract term"?

Generally, a term of a standard form contract is unfair if it:

  • would cause a significant imbalance in the parties' rights and obligations arising under the contract;
  • is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  • would cause detriment (financial or otherwise) to a party if the term were to be applied or relied

Background to the reform

The release of the UCT Exposure Draft Legislation follows a number of in-depth reviews and consultation processes since the UCT regime was initially introduced in 2010. The regime was intended to provide protections for consumers against unfair terms, in an effort to address the imbalance of bargaining power in relation to small businesses when dealing with standard form "take it or leave it" contracts, which often leave little opportunity for review and negotiation of contract terms.

In 2016, the regime was extended to apply to a broader range of standard form small business contracts that met certain criteria. Following this reform, the Review of Unfair Contract Term Protections for Small Business: Discussion Paper was released which sought views from a broad range of stakeholders. Data gathered from that process suggested that UCT's remained prevalent in small business standard form contracts, and that the regime failed to provide an effective deterrent as a result of the lack of penalties available to the court. The UCT Exposure Draft Legislation seeks to address these concerns.

For further detail on the background to these reforms, please see our blogpost here. In addition, for further detail on the recent extension of the UCT regime to insurance contracts, please see our article here.

Take me straight to the detail of the key changes!

The UCT Exposure Draft Legislation makes a number of key changes to the UCT regime. These changes fall broadly within three main categories:

  • Proposed amendments to strengthen the enforcement of the regime and the remedies available;
  • Proposed amendments to expand the class of small business contracts that are covered by the regime; and
  • Proposed amendments to clarify the regime.

The key changes are summarised in the tables below.

A. Proposed amendments to strengthen the enforcement of the regime and the remedies available

  1. Pecuniary penalties for contraventions: providing courts with the power to impose a substantial pecuniary penalty for each contravention of the prohibitions on proposing, applying or relying on an unfair contract term provision in a standard form contract, in addition to the current ability to declare it 'unfair'.

    The proposed amendments clarify that (arising each time an unfair term is relied on, including multiple instances of reliance on the same term) of the UCT laws will be subject to the ACL penalty regime, namely:
    • for businesses, the greater of A$10 million, three times the value of any benefit from the contravention and (if the value of the benefit cannot be determined) 10% of Australian turnover in the 12 month period prior to the contravention; and
    • for individuals, $500,000.
  1. Introduction of a rebuttable presumption: creating a new rebuttable presumption that the inclusion of a term that is the same as or similar to terms that have been found to be unfair and are subsequently included in other contracts, are also unfair. The presumption can be rebutted by a party in a subsequent proceeding by proving that it is not unfair in the particular circumstances of the subsequent case.
  1. More flexible remedies: empowering the court to order additional remedies that are not available for other breaches of the ACL and ASIC Act once a term has been declared unfair, whilst retaining the automatic voiding provisions which apply to unfair terms. This includes the express power to void, vary or refuse to enforce part or all of a contract (but not award damages), or make any order that the court thinks appropriate to prevent or reduce loss or damage that may be caused, or redress damage that has been caused. Notably, this goes beyond existing remedy provisions under the ACL and ASIC Act (which relate to loss or damage that has occurred or is likely to occur).
  1. Making clear a court's power to:
    • make orders applying to a term the same as or similar to a term previously declared unfair (whether or not that contract is put in the proceedings before the court); and
    • issue injunctions against a respondent with respect to existing or future standard form contracts entered into by a respondent, where the contract contains a term that is the same or substantially similar to a term the court has declared to be an unfair term. This has the effect of restraining a person from including or relying on such a term in their other contracts.

B. Proposed amendments to expand the class of small business contracts that are covered by the regime

  1. Increasing the small business definition thresholds: expanding the definition of "small business" to ensure that the regime will apply to any standard form contract where one party has up to 100 employees or annual turnover of up to A$10 million (previously 20 employees).
  1. Removing the contract value threshold: eliminating the upfront dollar value test in relation to the size of the contract (previously $300,000, or $1M if over 12 months in duration) so that the regime captures an expanded class of small business standard form contracts.

C. Proposed amendments to clarify the regime

  1. Providing more clarity on the scope of the regime:
    • ensuring that repeat usage of a contract must be taken into account by a court when determining whether a contract is a standard form contract; and
    • setting out matters that the court must not consider when determining whether a party was required to accept or reject terms of a contract or whether a party was given an effective opportunity to negotiate the contract.
  1. Exclusion of minimum standard provisions: exempting certain clauses where those clauses are included in standard form contracts in compliance with relevant Commonwealth, State or Territory legislation.

A more detailed comparison of the changes as against the current law is available in the UCT Exposure Draft Explanatory Materials, which can be accessed here.

What should I do?

If your business deals with consumers or other businesses on a standard contract basis, and either you or the counterparty have less than 100 employees or an annual turnover of less than A$10 million, we recommend reviewing your terms and conditions in light of the proposed broadened scope of the UCT regime.

KWM is assisting clients in undertaking reviews of their standard form contracts to ensure compliance with the proposed regime, as well as working with them to understand what will be required in relation to their specific business structure and customer base. If you'd like to understand how these changes could impact you or wish to draft a submission, please get in touch. We would be pleased to help.

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