Unfair contract terms reform big penalties and expanded application

What you need to know

• The Commonwealth Government has released a draft bill to strengthen the unfair contract terms protections for consumers and small business.
• The draft bill contains substantial changes to the unfair contract terms regimes in the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), with implications for businesses that use standard form contracts.
• Key changes include: expanding the regimes to a broader range of business contracts; introducing new prohibitions that attract significant penalties and a broader range of remedies; and a rebuttable presumption that similar terms to those declared to be unfair (in a party's own contracts or other contracts in the industry) are unfair.
• Public consultation on the exposure draft bill closes on 20 September 2021. 

What you need to do 

• Consider how the proposed changes to the unfair contract terms regimes would impact your business.  
• If you have concerns about the proposed changes, or guidance provided in the explanatory materials, consider engaging in the consultation process.  

What has just happened?

The ACL and (for financial products) the ASIC Act contain provisions dealing with unfair terms in standard form contracts with consumers and small businesses.  Where a Court determines that a provision of a standard form contract with a consumer or a small business is "unfair", that term is void.

A major overhaul of the unfair contract terms regimes in the ACL and ASIC Act is proposed.  On 23 August 2021, the Commonwealth Government released a draft bill (and associated explanatory materials) to strengthen unfair contract terms protections.  

Key changes are outlined below.

Proposal: unfair contract terms to become unlawful

The draft bill introduces two new prohibitions: 

• entering into a standard form contract which contains an unfair term proposed by the person; and
• applying or relying (or purporting to do so) on an unfair contract term.

Each of these prohibitions can be contravened multiple times in relation to the same contract (or even in relation to the same unfair term, if relied on more than once).

Each contravention would attract maximum pecuniary penalties of the greater of:

• $10 million;
• 3 times the benefit of the conduct (if the Court can determine the value of the benefit); 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 in the conduct, the maximum penalty would be $500,000. 

Further, the draft bill allows Courts to impose additional unfair terms-specific remedies, beyond those currently available, including orders (other than damages) as the Court thinks appropriate to prevent or reduce loss or damage that may be caused, where the Court has declared a term of the contract to be unfair.  This includes orders to void, vary or refuse to enforce part or all of a contract (or a collateral arrangement).

Additionally, on application by the ACCC or ASIC (as applicable), Courts may make orders:

• injuncting a person from entering into any future contract that contains a term that is the same or similar to a term in their contract that has been declared unfair; and 
• to prevent or reduce loss or damage which may be caused to any person (whether or not party to the proceedings) by a term in an existing contract that is similar to a term that has been declared unfair (including injunctions restraining the person from applying or relying on similar terms),

whether or not the future or existing contract is identifiable when the Court makes the orders.  

The Court's ability to make orders in respect of similar terms and contracts not subject to the proceedings is significant.  For example, this would mean that an unfair term in a standard form contract that has been entered into with 100 customers could be required to be amended across all 100 contracts, even if only one of the customers sought a declaration that the term is unfair.

Further, it is proposed that Courts would be able to issue public warning notices, adverse publicity orders, and personal orders disqualifying an individual from managing a corporation. 

Proposal: expand the definition of "small business"

The draft bill also proposes broaden the category of businesses that will be considered "small businesses" and receive the benefit of the unfair contract terms protections.  A "small business" will be one which:

• employs fewer than 100 persons (this is a major increase from the current limit of 20 persons); or
• had an annual turnover of less than $10 million in the previous income year at or before the time the contract was entered into.

Additionally, the draft bill proposes to remove the current upfront contract value threshold, meaning that any standard form contract with a small business would be subject to the unfair contract terms prohibitions.  Currently, a contract with an upfront price payable exceeding $300,000 (or $1 million if the contract is for more than 12 months) is not subject to the unfair contract terms regimes.

Proposal: similar terms to be presumed unfair

The draft bill introduces a rebuttable presumption relating to terms that have been declared unfair.  Terms that are the same or similar to terms found to be unfair will be presumed to be unfair in subsequent proceedings.  

This rebuttable presumption applies not only to terms proposed by the same person who proposed the original unfair term, but also to third party contracts in the same industry.  

This requirement is intended to encourage parties within an industry to review their standard form contracts, and amend those contracts where terms have been found to be unfair in other contracts.  For businesses that rely on or regularly enter into standard form contracts, this proposed change will require regular compliance checks to ensure that standard form contracts are updated to take into account recent unfair contract terms proceedings in the same industry. 

What is next? 

The Commonwealth Government is accepting submissions on the draft bill until 20 September 2021. 

Businesses should consider how the proposed changes to the unfair contract terms regimes would impact them.  Specifically:

• would your standard form contracts with businesses be subject to the new regime, given the expanded meaning of "small business" and removal of upfront value thresholds?
• are you comfortable that your standard form contracts do not contain unfair terms, exposing you to potentially significant penalties?
• have contracts in your industry been the subject of unfair terms proceedings, and if so, do your standard form contracts contain similar terms?
• what steps might you take to ensure compliance with the new laws, what resources do you need and how long would this take?
• are there aspects of the proposed changes that give rise to practical challenges, are not workable or difficult to operationalise?
• are you uncertain about the application of the proposed law to your contracts, and would any clarifications to the draft bill (or explanatory materials) help?

Businesses that are concerned about the proposed changes, or guidance provided in the explanatory materials, should consider engaging in the consultation process.  Submissions can be made directly, anonymously, by a party's legal representative, or through industry associations and similar organisations.  

Following consultation, the bill will be finalised and introduced in Parliament, where it will need to pass both Houses before becoming law.  The draft bill proposes that the new law will commence 6 months after the bill receives Royal Assent, and apply to standard form contracts entered into or varied after that date.  

We recommend keeping an eye on the draft bill over the coming months, and taking steps now to ensure your business is ready for the changes to the unfair contract terms regimes when they come into effect.

Authors: Tihana Zuk, Partner and Rowan Kendall, Senior Associate.