Federal Government releases draft reforms to the unfair contract terms regime

The Federal Government has unveiled an exposure draft of the Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Unfair contract term reforms (Exposure Draft) which seeks to amend the Australian Consumer Law (ACL) to improve the unfair contract terms (UCT) regime.

Current regime

The current UCT regime contained in the ACL (as set out in Schedule 2 of the Competition and Consumer Act 2010) has been in place since 2016. The UCT regime pertains to standard form consumer or small business contracts - also known as “take it or leave it” contracts. In other words, contracts that are usually prepared by one party and not negotiated between the parties, such as telecommunication, gym, motor vehicle and travel contracts.

The current UCT regime does not consider UCTs within standard form contracts to be unlawful, but a court or tribunal may consider the terms void if the contract is disputed.

What is a standard form contract?

The ACL does not define “standard form contract”. This usually depends on whether the contract can be negotiated and whether the contract accounts for particular conditions in relation to the transaction between the parties. A consumer contract is presumed to be standard form contract unless the  business relying on a particular term can prove otherwise.

A contract term is considered unfair if:

• it would cause financial or other forms of disadvantage to a party if it were to be applied;

• it would cause a substantial disparity in the parties’ rights and obligations arising under the contract; and

• it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

UCTs generally include limitations or obligations on one party, termination clauses, penalising clauses for breach or termination of contract, the ability for one party to vary the terms of the contract and to unilaterally determine whether the contact has been breached.

Amendments proposed by the Exposure Draft

The anticipated changes are set to apply to new contracts that are entered into on or after the commencement date of the amendments (being six months after the Bill receives royal assent). Existing contracts or terms of an existing contract that are renewed at or after the commencement date will also be subject to the amendments.

This is intended to decrease the prevalence of UCTs and address non-compliance concerns. The below table provides a summary of the proposed changes.

Current law	Proposed changes in Exposure Draft
No current equivalent.	A financial penalty may be imposed where a person proposes, applies, relies or purports to apply or rely on a UCT. For a body corporate – the financial penalty will be calculated as the greater of either: - $10 million; - three times the value of the benefit of the UCT; or - 10% of annual turnover during the preceding 12-month period. For individuals - the financial penalty is up to $500,000.
The Court can injunct a party from applying or relying on a term of a contract that has been acknowledged to be unfair.	In addition to the current power, the Court will have the power to to injunct a person from: - entering future contracts that contain the same or 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 current equivalent.	There will be a rebuttable presumption that a contract will be presumed unfair if the same or a substantially similar term has been considered unfair in another proceeding in similar circumstances such as the same entity or in the same industry.
“Small business” threshold is currently: - fewer than 20 employees; - and either: (a) upfront price payable under the contract is less than $300,000; or (b) $1 million if the contract is longer than 12 months.	‘Small business’ threshold to be amended to: - less than 100 employees; or - annual turnover of less than $10 million.
In determining whether a contract is a “standard form contract”, the Court must consider: - 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.	In addition to the current matters, the Court will be required to consider whether a party has used the same or similar contract before, and the number of times this has been done. The court will not take into consideration: - the opportunity to negotiate minor or insubstantial changes; - the option or opportunity to select a term from a range of pre-determined 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.

Key takeaways

The changes outlined in the Exposure Draft are focused on enforcement of the UCT regime and prioritising the rights of small businesses and consumers.

The amendments will now capture a much wider range of business contracts. If you have a standard form contract with either a consumer or business, and you or the business have less than 100 employees or $10 million in annual turnover, you should consider having your contract reviewed to ensure that the terms will not be penalised under the amended regime.

Submissions in response to the Exposure Draft are open until the 20 September 2021. However, we note that the commencement date for implementing the changes is currently unknown.

We will be monitoring this space and provide updates when necessary. For more information or to have your contracts reviewed, please contact:

Paul Gray
Principal
T: 03 5225 5231
M: 0414 195 886
E: pgray@ha.legal

 Hugo Le Clerc
Lawyer
T: 03 5225 5213
E: hleclerc@ha.legal

Ryan Popovski
Graduate Lawyer
T: 03 5226 8572
E: rpopovski@ha.legal

Prepared with the assistance of India Smith, research assistant.