Unfair Contract Terms: Government Releases Draft Legislation

25/08/2021

After much anticipation, the Federal Government has released the exposure draft of its Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Unfair contract term reforms (the Exposure Draft). The Exposure Draft seeks to amend the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (Cth) to strengthen the existing unfair contract term (UCT) regime.

The Exposure Draft follows developments we reported on in November last year - Unfair Contract Terms: Government planning to introduce penalties. At that time, the Federal Government’s plans were to strengthen the unfair contract terms (UCT) regime under the Australian Consumer Law by, amongst other things, deeming UCTs to be unlawful and giving courts the power to impose civil penalties on those found to be non-compliant. Fast forward 9 months to 23 August 2021, and the Government has released its exposure draft legislation setting out the proposed amendments in full.

By way of refresher, the regime protects consumers and small businesses from UCTs in standard form contracts. The changes in the Exposure Draft are largely seen as a response to a lengthy campaign by the Australian Competition and Consumer Commission (ACCC) highlighting issues around enforcement of the regime and the need to further bolster consumer and small business protections.

The Proposed Changes

The Exposure Draft aligns with proposed amendments announced to date and previously agreed to by state and territory consumer ministers.

The proposed amendments are set to only apply to:

new contracts entered into at or after the commencement date;
existing contracts that are renewed at or after the commencement date; and
terms of an existing contract that are varied at or after the commencement date,

(the ‘commencement date’ for these amendments being six months after the Bill receives Royal Assent).

The proposed amendments are as follows:

Current law	New law
UCTs are void	A person is prohibited from entering into, applying or relying on (or purporting to apply or rely on) a UCT. Each unfair term contained in a contract is considered a separate contravention.
No equivalent	A pecuniary penalty may be imposed if a person proposes, applies, relies, or purports to apply or rely, on a UCT amounting to: for a body corporate – the greater of (i) $10 million, (ii) three times the value of the benefit of the UCT or (iii) 10% off annual turnover during the preceding 12-month period; or for an individual - $500,000.
The Court may make orders: where a person has suffered, or is likely to suffer, loss or damage because of an UCT; and/or to void, void ab initio, vary or refuse to enforce part or all of the relevant contract (or collateral arrangement).	In addition to the current laws, the Court may make orders it considers appropriate to prevent or reduce loss or damage that has, or may be, caused by the UCT, including to existing contracts that contain the same or similar terms.
The Court may injunct a party from applying or relying on (or purporting to apply or rely on) a term of a contract that has been declared unfair.	In addition to current injunction powers, the Court may injunct a person from: entering future contracts that contain the same or a substantially similar term; and/or applying or relying on a term in any existing contract with the same or a substantially similar term, whether or not that contract is before the Court.
No equivalent	Unless a party proves otherwise, a contract term will be presumed unfair if the same or a substantially similar term has been deemed unfair in another proceeding in similar circumstances (e.g. proposed by the same entity or in the same industry).
‘Small business’ threshold is: fewer than 20 employees; and either: upfront price payable under the contract is less than $300,000; or $1 million if the contract is longer than 12 months.	‘Small business’ threshold is: fewer than 100 employees; or annual turnover of less than $10 million.
In determining whether a contract is a ‘standard form contract’, the Court must take into account a number of matters including: whether one party was required to reject or accept the terms of the contract in the form it was presented; or was given an effective opportunity to negotiate the terms of the contract.	In addition to current matters, the Court must consider whether a party has used the same or a similar contract before, and the number of times this has been done. The Court must not consider: whether a party had an opportunity to negotiate minor or insubstantial changes; whether a party had an opportunity to select a term from a range of options; or the extent to which a party to another contract or proposed contract was given an effective opportunity to negotiate terms of the other contract or proposed contract.
The law refers to non-party consumers.	Applies to both ‘non-party consumers’ and ‘non-party small businesses’.

How to address the UCT changes?

In light of the proposed changes, drafting standard form contracts requires more consideration of whether terms could be considered unfair. If you have consumer or small business contracts that are captured by the proposed threshold, you should take the following two steps.

Identify terms at risk of being considered unfair

The proposed changes do not introduce a definition of the concept of ‘unfairness’. This means a term in a standard form consumer or small busines contract will still be considered unfair if:

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

In assessing unfairness, the context is important, including the specific legitimate interests that may exist. That said, some examples of terms that may be at risk include terms that permit one party, but not another, to:

be indemnified;
terminate the contract;
vary the terms of the contract; or
automatically renew an agreement.

In assessing the fairness of a term, a court will consider the transparency of the term (including clear language, legibility and clear presentation) and how the term operates within the contract as a whole.

Address the UCTs

Once you have identified the at risk terms, consider the steps necessary to address the risks of unfairness. This may include making one or more of the following revisions:

making the term mutual;
narrowing the term to address specific risks;
making the term more explanatory so a reader understands it purpose;
simplifying complex drafting; or
making a clause more reasonable.

Alternatively, consider deleting the term from the contract if the term is rarely relied on or significantly imbalanced.

It can be helpful to record any changes made to a term and in particular the reasoning for the clause being changed in a particular way, for future reference.

What next?

Submissions to the Government on the exposure draft legislation and explanatory materials is open until 20 September 2021. At this stage, the timing for introducing the proposed amendments is unknown, so make sure to continue watching this space.

While it is unclear when the proposed amendments will be implemented, businesses entering into new, or renewing existing standard form contracts for consumers and small business caught by the new threshold should start reviewing their standard terms to ensure to avoid that the proposed pecuniary penalties.