CN07 - Unfair contract terms reform on the horizon

A new era of unfair contract terms enforcement is on the horizon. On 9 February 2022, a Bill was introduced into Parliament proposing changes to Australia's unfair contract terms laws that apply to consumer and small business contracts.  Among the proposed changes is the introduction of new prohibitions that will attract significant penalties if violated. 

Key takeaways

• A Bill presently before Parliament will (if passed) amend the unfair contract terms provisions in Part 2-3 of the Australian Consumer Law ("ACL") and Part 2 (Division 2, Subdivision BA) of the Australian Securities and Investment Commission Act 2001 (Cth) ("ASIC Act").
• Following a period of consultation on proposed reforms which were published in an exposure draft in August 2021, the Bill marks the first step toward a significant legislative shift in unfair contract terms enforcement.
• Key changes include: introducing new prohibitions that attract significant penalties; a broader range of remedies for courts to impose in relation to unfair terms; and expanding the regime to a larger pool of small business contracts. Ahead of the Bill being enacted, businesses should actively consider how the proposed changes will impact them.

Key reforms

Most significantly, in a bid to strengthen the enforcement provisions and remedies under the regime, the Bill introduces new prohibitions against:

• making a standard form contract which contains an unfair term; and
• applying or relying (or purporting to rely) 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 a pecuniary penalty – presently the maximum pecuniary penalties for corporations:

• under the ACL are: (i) AUD 10 million; (ii) 3 times the benefit of the conduct (if the Court can determine the value of the benefit); or (iii) 10% of the annual turnover of the party for the previous 12 months (if the Court can't determine the value of the benefit); and
• under the ASIC Act are: (i) 50,000 penalty units (AUD 11.1 million); (ii) 3 times the benefit of the conduct (if the court can determine the value of the benefit); or (iii) 10% of the annual turnover of the party for the previous 12 months (up to a maximum of 2.5 million penalty units, or AUD 555 million).

The Bill also:

• introduces additional remedies for a court to impose in unfair terms proceedings, including injunctions restraining a party from including a term that is the same or substantially similar in effect to a declared unfair contract term in any future standard form contracts;
• expands the class of small business contracts to which the regime will apply:
  • under the ACL, the protections will apply to a small business contract where one party has < 100 employees (up from 20); or < AUD 10 million turnover in the last income year (there will no longer be an upfront price payable threshold); and
  • under the ASIC Act, the protections will apply to a small business contract where the upfront price payable is ≤ AUD 5 million; and one party has < 100 employees or < AUD10 million turnover in the last income year;
• clarifies that a contract may still be standard form despite there being an opportunity for: (i) a party to negotiate changes that are minor or insubstantial in effect; (ii) a party to select a term from a range of options; and (iii) a party to another contract or proposed contract to negotiate terms of the other contract; and
• exempts certain terms from the unfair contract terms laws where included in compliance with relevant Commonwealth, state or territory legislation and excludes the following categories of contracts: (i) operating rules of licensed financial markets such as the ASX; (ii) operating rules of licensed clearing and settlement facilities; (iii) real time gross settlement systems approved by the RBA; and (iv) certain life insurance contracts.

The Bill's introduction to Parliament follows a period of consultation on proposed reforms published in an exposure draft in August 2021 (see our earlier publication on the exposure draft here).  Notably, unlike the exposure draft, the Bill does not include a rebuttable presumption that terms are unfair if they are the same or similar to terms previously found to be unfair, and proposes that the new regime commence 12 months from royal assent (as opposed to 6 months).

The Bill is presently before the House of Representatives and must also pass the Senate before becoming law.   

Preparing for what's to come

The reforms are proposed to come into effect 12 months after the Act receives royal assent, allowing a sufficient period of time for standard form contracts subject to the new regime to be reviewed and, if necessary, amended. 

Before the Bill becomes law and the penalty provisions take effect, businesses should:

• assess whether the expanded unfair contract terms regime will apply to any existing or future standard form consumer and small business contracts;
• reflect on terms that have previously been declared void and unenforceable by the court under the current regime and ensure such terms are not a feature of future standard form contracts; and
• prepare for the proposed changes – in advance of the Bill coming into force - by reviewing relevant standard form contracts to ensure they are unfair terms compliant, considering whether templates need to be updated, and how to deal with existing standard form contracts that may automatically renew after the new regime comes into effect.

With thanks to Rubaina Sehgal of Ashurst for her contribution.