Massive penalties, more contracts caught by exposure draft legislation for unfair contract terms reform open for comment

Businesses face massive pecuniary penalties for including or relying on unfair contract terms (UCTs) in standard form consumer or business contracts under beefed-up UCT laws, which will also will capture a much wider number of business-to-business contracts under new draft legislation which is open for comment until 20 September.

The exposure draft legislation and explanatory materials released yesterday by Treasury for its long-awaited suite of reforms to the UCT laws found in the Australian Consumer Law (ACL) and Australian Securities and Investments Commission Act 2001 (ASIC Act), codifies reforms to the UCT regime previously announced by Commonwealth, State and Territory Ministers for Consumer Affairs in November 2020, following a 2018 review of the UCT protections and a period of public consultation on a Regulation Impact Statement.

While the exposure draft legislation is broadly consistent with the government's Decision Regulation Impact Statement, a handful of further changes have been made. We have set out below what was expected, and what is new, in the draft bill.

In light of what is proposed, you need to get up to speed – now. If you wish to brush up on the UCT laws and what they currently apply to, you can read our refresher published earlier this year in preparation for these reforms: Unfair contract terms 01: Getting ready for a big year of reforms.

The six key changes to unfair contract terms laws we expected

As expected, the exposure draft legislation makes six key changes to the UCT regime:

• Pecuniary penalties for contraventions: The exposure draft legislation prohibits the inclusion of, or reliance on, unfair terms in standard form consumer or small business contracts and enables a Court to impose substantial pecuniary penalties for each contravention (more on that below).
• Significantly expanded scope for business-to-business contracts: The laws expand the definition of "small business", meaning the UCT protections will apply to any standard form contract where one party has up to 100 employees or annual turnover up to A$10 million. It has removed altogether any dollar value test for the size of contract – all contracts with a "small business" have to comply.
• More flexible remedies: The exposure draft legislation empowers courts to impose a wide range of remedies once a contract term has been declared "unfair". However, these remedies go even further than previously contemplated (again, more on that below).
• Introduction of a rebuttable presumption: Where a contractual term has previously been declared to be unfair by a court, there will be a rebuttable presumption in subsequent proceedings that a term that is "the same or substantially similar in effect" is also unfair, but only where the term is proposed by the same person who proposed the original unfair term or where the term is part of a contract that is in the same industry as the contract that contained the original unfair term.
• More clarity on what a "standard form contract" is: While there is still no precise definition of a "standard form contract", the draft Bill:
• adds as an additional matter that the court must take into account in determining whether a contract is "standard form" the concept of repeat usage of a contract that is "the same or substantially similar" ie, the more times a contract has been used, the more likely it is standard form; and
• clarifies that in considering whether a contract was offered on a take-it-or-leave-it basis or whether the other party had an "effective opportunity to negotiate" its terms (which are two of the factors a court must have regard to), a court must disregard instances where a party had the opportunity to negotiate "minor or insubstantial changes" or select a term from a range of pre-determined options. Another party's opportunity to negotiate another contract is irrelevant (i.e. if a small subset of consumers or businesses were able to negotiate the terms of a contract issued to a broader group of consumers/businesses).
• Exclusion of "minimum standards" provisions: the draft Bill expressly clarifies that the UCT laws do not apply to terms that are read into a contract by the operation of a Commonwealth, state or territory law. Examples are some tenancy protection terms that may be implied by law.

… and the details we were waiting for:

The exposure draft legislation provides additional colour and clarity to the six key reforms:

• Quantum of pecuniary penalties: the draft Bill confirms that each contravention of the UCT laws will be subject to the penalty regime which applies to other contraventions of the ACL, 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.
• Two separate prohibitions: in a new development, the draft Bill creates separate prohibitions against entering into a standard form contract containing an unfair term that the person proposed, and applying or relying on (or purporting to apply or rely on) an unfair term. This is a new concept in the Competition and Consumer Act 2010 (Cth). Typically prohibitions have been against "entering into", and "giving effect to" problematic provisions.
• Multiple contraventions are possible: the draft Bill makes clear that each unfair term in a contract will amount to a separate contravention, and that a separate contravention will arise each time an unfair term is relied on (or purported to be relied on), including multiple instances of reliance on the same term.

  The upshot of these two elements is that if a business relies on a term found to be unfair it will be liable to two pecuniary penalties – and potentially, further penalties for each additional unfair term in the contract and each instance an unfair term was relied on.

• Remedies: The draft Bill retains the automatic voiding provisions which apply automatically when a term is declared unfair (previous consultations considered removing these provisions). In addition, it augments the existing remedy provisions of the ACL and ASIC Act by empowering a court to order additional remedies unique to UCTs once a term has been declared unfair. These include:

• • on application of a party to a contract or the ACCC/ASIC with the party's consent, 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 – this expressly empowers the court to void, vary or refuse to enforce part or all of a contract (but not award damages), and is notable for going beyond existing remedy provisions under the ACL and ASIC Act which are only available if loss or damage has occurred or is likely to occur. While existing case law under the CCA does define "likely", the test of "may" is entirely new and appears to be pitched at a lower standard; and
  • orders (on the application of the ACCC or ASIC) preventing a similar term from being included in any future standard form small business or consumer contract by the respondent, or to prevent, reduce or redress loss or damage to any person by a similar term in any existing contract to which the respondent is a party – these orders include injunctive powers.

Importantly, these remedies extend to any existing consumer or small business standard form contracts entered into by a respondent (whether or not that contract is put before the court) that contains an unfair contract term that is the same or substantially similar to a term the court.

Getting ready for enhanced UCT laws

If you have standard-form contracts with consumers or with other businesses, and you or the other business have less than 100 employees or A$10 million annual turnover, you need to immediately review the terms of any standard-form contracts. If they have previously been reviewed, it would be prudent to check if any changes or amendments have been made since that review.

Non-compliance with the proposed amendments is not an option given the legal risks of "getting it wrong". The exposure draft legislation makes clear that businesses will soon face very serious consequences if they are found to have contravened the UCT laws, particularly given the risk of multiple contraventions.

In the meantime, the Government has invited stakeholder views on the exposure draft legislation, and submissions can be made between now and 20 September 2021. If you'd like to understand how these changes could affect your business, or want help to draft a submission, please contact us.