Increased protections against unfair contract terms

22 October 2021

In early September, the government released the proposed amendments to the unfair contract terms regime under the Australian Consumer Law (ACL), which once implemented, will have significant impacts on businesses.[1]

The purpose of the amendments is to strengthen consumer protection and encourage compliance with the ACL by deterring business from having unfair terms in contracts. Such action aligns with the ACL’s overarching purpose of better protecting Australian consumers whilst addressing the power imbalance between consumers and businesses.

Unfair contract terms regime

Under the ACL, for the regime to apply to a contact it must meet the following criteria:[2]

  1. Be a ‘standard form consumer contract’;

A standard form contract is one that is typically prepared by one party and cannot be negotiated (e.g. gym memberships, phone plans and some finance documents such as loan agreements) and are for:

(a) the supply of goods or services; or

(b) the sale or grant of an interest in land; or

(c) personal, domestic or household use or consumption.[3]

In determining whether a contract is a standard form contract, factors such as relative bargaining powers between the parties and whether it was presented on a ‘take it or leave it’ bases, are relevant.[4]

  1. Be either a ‘small business contractor ‘consumer contract’; and

A contract is a small business contract if at least one party is a business with fewer than 20 employees and either:[5]

(a) the upfront price payable under the contract does not exceed $300,000; or

(b) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

A consumer contract is a contract for the supply of goods or services, or a sale or grant of an interest in land to an individual whose acquisition for the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.[6]

  1. Contain terms that are ‘unfair’

A terms will be unfair, and therefore void, if it:

(a) causes a significant imbalance in the respective rights and obligations under the contract;

(b) is not reasonably necessary to protect the legitimate interests of the benefitting party; and

(c) would cause a detriment to the other party.[7]

Some terms are exempt from being considered unfair including terms that define the good or service, provide for the method of delivery or that have been subject to some negotiation.[8] If all requirements are met, then the term will be deemed unfair and will be void.

Under the current regime both private individuals and the ACL regulators (such as the Australian Competition and Consumer Commission) can apply to a Court to have a term deemed unfair in standard contracts, however no monetary penalties apply. The upcoming amendments will introduce significant monetary penalties and broaden the type of remedies available. It is hoped these amendments will act as both a protection mechanism for consumers and a strong deterrence for businesses engaging in such conduct.

The new amendments

The noteworthy proposed amendments include:

  1. expanding the definition of ‘small business contracts’;
  2. broadening the penalties available; and
  3. introducing a rebuttable presumption of similar terms to be unfair.

1. Expanding the definition of ‘small business’

The new amendments will broaden the definition of ‘small business’ and remove the contract value threshold in order to capture more businesses. The regime will apply to a small business contract if one party is a business that:

(a) employs fewer than 100 employees (casual employees are not included unless employed on a systemic basis); or

(b) has a turnover of less than $10,000,000.

The definition of a consumer contract under the ACL remains unchanged.

2. Increasing and broadening penalties

Arguably the most significant changes are to the penalties that will apply. For individuals, a contravention will attract a maximum penalty of $500,000 and for businesses, the greater of:

(a) $10 million;

(b) three times the benefit of the contract; or

(c) 10% of the annual turnover of the contravening party for the previous 12 months.

Courts will have additional powers to make orders beyond monetary penalties such as declaring the entire contract unenforceable. Where a regulatory body institutes proceedings, the Court will be able to make wider orders such as stopping a person from entering into a contract that contains a term (or similar term) if it has been declared unfair.

The Court’s ability to make orders in relation to similar terms in other contracts is significant as it means other contracts can be declared to contain an unfair term without having to be part of Court proceedings. The intention behind this is to increase compliance by incentivising businesses to hold others accountable and keep up to date with relevant Court decisions. From a consumer perspective, Courts will also be able to issue public warning notices, adverse publicity orders, and personal orders disqualifying an individual from managing a corporation.

3. Rebuttable presumption

Following the Court’s increased powers is the introduction of the rebuttable presumption whereby once a term is declared to be unfair, a contract that includes the same (or similar term) will be presumed unfair unless it can be proved otherwise.¬† The presumption applies where the same person who was found to have used an unfair term later tries to use the same or similar term in another contract. It is hoped this will deter continued use of a term that has been found to be unfair and encourage parties within an industry to review and amend terms that are the same or similar.[9]

Overall, the amendments are intended to encourage compliance, provide clarity and certainty for consumers and heighten the Court’s ability to regulate unfair practises.

What this means for you and your business

The amendments are expected to come into effect early to mid-2022 from which point businesses will have six months to identify contracts that might fall under the regime and have them reviewed by a lawyer and amended where necessary.

The review process can be time consuming for businesses particularly larger businesses that may need to amend several internal contract templates and update internal processes and systems. This is an opportune time to start reviewing all contracts to ensure that they will meet the impending amendments and become familiar with the new regime to minimise the disruption to your business.

Our commercial team at Mahoneys can assist with reviewing your contracts and advise where necessary what amendments are required to ensure compliance.

If you would like further information as to how these changes may affect your business contracts, please contact Mahoneys commercial Partner, Antony Harrison, or Lawyer, Sabrina Austin on (07) 3007 3777 or aharrison@mahoneys.com.au or saustin@mahoneys.com.au.

 

[1] Exposure draft, Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Unfair contract terms reforms (Cth).

[2] See useful guide:  https://consumer.gov.au/sites/consumer/files/2016/05/0553FT_ACL-guides_ContractTerms_web.pdf

[3] Competition and Consumer Law Act 2010 (Cth) (ACL) sch 2, s 23(3).

[4] Ibid s 27.

[5] Ibid s 23(4).

[6] Ibid s 23(3).

[7] ACL s 24.

[8] See ACL s 48; Director of Consumer Affairs Victoria v Craig Langley Pty Ltd & Matrix Pilates and Yoga Pty Ltd [2008] VCAT 482.

[9] Treasure Laws Amendment (Measures for a later sitting) Bill 2021: Unfair contract terms reforms, Exposure draft explanatory notes.


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