Unfair contract terms reforms – Stronger unfair contract protections proposed for consumers and small business

Unfair contract terms reforms – Stronger unfair contract protections proposed for consumers and small business

The Australian Consumer Law and ASIC Act each contain identical provisions that give consumers and small business the right to have contract terms in standard form contracts declared to be void if they:

  • cause a significant imbalance in the party’s rights and obligations; and
  • are not reasonably necessary to protect the legitimate interests of the party who would be advantaged by such terms, and
  • would cause financial or other detriment to a party if the term were to be applied or relied on.

The ASIC Act applies to financial services and regulated credit.  The Australian Consumer Law applies to the rest of business.  The provisions have been steadily extended since they were first introduced in 2010. Treasury is now undertaking a consultation process and the changes proposed continue that trend.

If adopted, the proposals will greatly increase both the reach and consequences of violation of the unfair contract terms regime.

Increased reach

The definition of small business under the current regime is limited to a business that employs fewer than 20 persons at the time the contract is entered into and a contract price threshold is met (either $300,000 or $1 million depending on the circumstances).  This is proposed to be replaced by a test based on employee numbers and business turnover.

The maximum number of employees to remain within the meaning of a small business is increased to 100 full time equivalent staff.  This is in line with the definition of small business in relation to which the Australian Financial Complaints Authority (AFCA) has jurisdiction.  In addition, the business must have a turnover of less than $10 million in the income year preceding the year in which the contract is entered to have the protection of the unfair contract term provisions.

The reach of the regime is also proposed to be extended through increased powers of the courts to make orders not just to void terms determined to be unfair, but to prevent or reduce damage that may be caused, or remedy damage that has been caused.  It would no longer be necessary to show that loss or damage had been suffered, and the court may make orders if it is shown that the orders sought may prevent loss or damage that may be caused.

Furthermore, ASIC or the ACCC may apply for orders preventing a term that is the same or substantially similar to a term that has been declared as unfair from being included in any current or future standard form small business or consumer contract entered by the respondent to the proceedings.

The courts retain the power to make these orders up to 6 years after the day on which the declaration is made that a term is determined to be an unfair term for the purposes of the relevant legislation.

The bill provides that a term of a contract alleged to be unfair that is the same or substantially similar to a term determined to be unfair in previous court proceedings will be presumed also to be unfair, unless the party that proposed or relies on that term can prove that it is not unfair.  This is intended to encourage businesses that use standard form contracts to monitor their industry and ensure that terms that are found not to protect legitimate business interests are removed.

Increased consequences

In addition to the increased reach of the proposed laws, two new prohibitions are proposed, to either:

  • enter into a standard form consumer or small business contract that contains an unfair term proposed by the person; or
  • apply or rely on an unfair term in a standard form consumer or small business contract.

Contravening these prohibitions is to be subject to pecuniary penalties of up to the greater of $10 million or 3 times the benefit of the conduct, if this can be calculated, or 10% of the annual turnover of the party for the previous 12 months if the court can’t determine the value of the benefit.  For individuals involved, the maximum penalty is $500,000.

These penalties would apply per unfair term, per contract.  The implications of these remedies given that standard form contracts are frequently used in a high volume of transactions over a short period of time is significant.

In addition, it is proposed that courts would be able to require the issue of public warning notices, adverse publicity orders, and ordering disqualification from managing a corporation.

Next steps

Should these provisions become law it will be important for all businesses that deal with consumers or small business (as either a customer or a supplier) to consider their response.  This might be, for example, to review the standard form contracts used by the business ensure that every provision placing obligations on the other party can be justified by protection of the parties’ legitimate business interests, or to consider measures to screen out any person or business that would be within the scope of the regime and avoid dealing with them.

It should be stressed that these proposals remain as a draft for consultation and may or may not proceed.  We will continue to monitor this area and keep our clients informed of developments.

Treasury is accepting submissions until 20 September 2021.

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