Unfair Contract Terms – no longer a ‘toothless tiger’– new penalties for Australian businesses.
By Scott McKenzie (Director), Robert Wilson (Associate), Velocity Legal
The Australian Competition and Consumer Commission and the Small Business Ombudsman have found that unfair contract terms (UCT) provisions are still rife in standard form contracts.
As a consequence of their findings, Assistant Treasurer the Hon Michael Sukkar MP has recently announced proposed changes to UCT provisions that look to broaden the reach UCT protections for Australian businesses. The Australian Small Business and Ombudsman Kate Carnell has said that the expanded definition of small businesses:
‘means 99% of businesses will be afforded these protections.’
Further, Mr Sukkar has indicated that courts will now be able to impose punishment by civil penalties on companies that continue to include UCT in their standard form contracts.
Consumers and small businesses are protected by numerous guarantees and warranties under Australian Consumer Law. These are set out in Schedule 2 of the Competition and Consumer Act 2010 (Cth).
Amongst other things, they are protections against:
1. misleading and deceptive conduct;
2. unconscionable conduct;
4. false or misleading representations;
5. unsolicited supplies;
6. pyramid schemes;
7. pricing; and
8. other unfair practices.
For this article, we will only be focusing on UCTs.
To be covered by the UCT provisions, a contract needs to be either a:
1. consumer contract which is a contract for:
a. a supply of goods or services; or
b. a sale of an interest in land, to an individual whose acquisition of the goods, services or interest is for personal, domestic or household use or consumption; or
2. small business contract which is a contract that:
a. is for a supply of goods or services, or a sale of land;
b. at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
i. the contract does not exceed $300,000; or
ii. If the contract has a duration of more than 12 months, the contract does not exceed $1,000,000.
If you have a contact that is deemed to be either a consumer or a small business contract, the terms in that contract may be void if:
1. the term is unfair; and
2. it is a standard form contract (SFC).
What is an unfair term?
Three requirements must be satisfied before a term is ‘unfair’. A term is unfair if it would:
1. cause a significant imbalance in the parties’ rights and obligations;
2. would not be reasonably necessary to protect the legitimate interests of the advantaged party; and
3. would cause detriment (financial or non-financial) if it were relied on.
In determining whether a term is unfair, the court must consider whether the term is ‘transparent’, and must consider it in the context of the whole contract.
What is a standard form contract?
The current drafting in the legislation does not define a SFC but provides guidance to the courts on what to consider when classing a contract as an SFC. As a consequence, the courts have adopted a broad view of its definition. Generally, a SFC is a contact that has typically been prepared by one party to the contract and is often not subject to negotiation between the parties – that is, it is offered on a ‘take it or leave it’ basis.
The following are particularly susceptible to being SFCs:
1. customer terms and conditions;
2. supply agreements;
3. finance contracts;
4. commercial leases;
5. domestic building contracts; and
6. membership agreements for gyms.
Effect of contravention
The Australian Securities and Investments Commission (ASIC), a state or territory regulator or a party to a consumer contract or small business contract can make an application to the court for a declaration that a term of the contract is an unfair term.
The regulators’ right to intervene recognises that consumers and small businesses are commonly asked to sign SFC, and there may be little economic value for them to take legal action to declare a term in a SFC void.
If a party seeks to rely on a term that has been declared unfair, certain remedies become available including:
1. a declaration that part of a contract void;
2. orders varying a contract; and
3. orders to refund money.
However, unlike unconscionable conduct or if a party makes a false representation, the current law does not impose a financial penalty for breaching the UCT provisions.
The federal, state and territory governments have agreed in-principle to the following changes to UTC provisions.
|Definition of ‘Small business’.||To be eligible for protection a small business needs to employ fewer than 20 people.||An increase of the eligibility threshold for the protections including:
· a small business now needing to employ fewer than 100 employees; and
· introduction of a new ‘annual turnover’ threshold of less than $10 million as an alternative threshold for determining eligibility.
|Monetary threshold.||For a contract to come under the protections, the monetary threshold for the contract must be less than $300,000 or $1,000,000 (if the contract is over a year long).||The removal of the requirement for the upfront price payable under a contract to be below a certain threshold for the contract to be covered by the protections.|
|Definition of ‘Standard form contract’.||Undefined in the legislation however, guidance is provided to courts when determining if a contract is a SFC.||The changes aim to improve the clarity around the definition of SFC, by providing further certainty on factors such as repeat usage of a contract template, and whether the small business had an effective opportunity to negotiate the contract.|
|Civil penalties can be imposed.||There are currently no civil penalties that are imposed by a court for the use of a UCT.||Although there are no specific details on what the penalties may be, the changes include making UCTs unlawful and giving courts the power to now impose a civil penalty.|
|Provision of remedies.||Courts can make a declaration that a term in a contract is unfair. If the term goes to the root of the contract, the whole contract is invalidated. On the other hand, if the contract can operate without the unfair term, then the unfair term is severed from the contract and the contract will continue to bind the parties. The remedies include:
· compensation orders;
· orders to provide redress; and
· orders to prevent or reduce loss or damage.
The ACCC and ASIC may seek redress orders on behalf of a class of consumers who were affected by an unfair term (‘non-party consumers’). However, it is presently unclear whether orders are limited to those affected by an unfair term in a consumer contract or if it also extends to those affected by an unfair term in a small business contract.
|The changes include the provision of more flexible remedies to a court when it declares a contract term unfair by:
· giving courts the power to determine an appropriate remedy, rather than the term being automatically void;
· clarifying that the remedies available for ‘non-party consumers’ also apply to ‘non-party small businesses’; and
· creating a rebuttable presumption provision for UCTs used in similar circumstances.
|Minimum standards.||The current provisions exclude terms ‘required, or expressly permitted, by a law of the Commonwealth or a State or Territory’. This ensures that a Court is not required to determine the fairness of terms that are required to be included, or expressly permitted to be included, in contracts as a matter of public policy.||Enable certain clauses to be exempt from UCT provisions that includes ‘minimum standards’ or other industry-specific requirements.|
The proposed changes to the legislation will certainly increase the range of contracts and entities that are caught under UCT provisions. The powers of courts to grant a civil penalty for parties that breach UCT provisions may have the impact of deterring parties from using of unfair contract terms.
Where to from here?
On 9 November 2020, the Consumer Affairs Ministers at the Commonwealth, State and Territory levels approved the actions outlined by the Treasury.
Treasury has advised that it will develop exposure draft legislation, which will provide a further opportunity for stakeholders to comment on the detail of the reforms.
Recommendations and practical guidance
With the addition of civil penalty provisions, it is now more important than ever to ensure that contracting parties do not contravene the UCT provisions. If you are a business that has entered into, or is likely to enter into, a standard form contract with a small business, we recommend that you seek expert legal assistance to:
1. review your current standard contracts (e.g. customer T&Cs) and establish which of those contracts may be captured by the UCT regime – both currently and under the proposed changes;
2. establish whether your high-value contracts (>$300,000 or >$1,000,000) would fall under the new UCT provisions;
3. review any standard form contracts that are in place and assess the terms that may be found to be unfair;
4. analyse the risks of the contract and identify imbalanced provisions, determine if they are reasonably necessary to protect legitimate interests and assess whether they cause detriment; and
5. determine whether the contracts should be amended or the terms removed.
If you have any specific questions in regards to your standard form contracts in place, please contact us. Our team is here to help you navigate the current UCT law and the proposed changes to it.
This article is the opinion of the author and in no way constitutes legal advice.
Scott has been recognised as a leading commercial lawyer in Australia. He is held in high regard for his strategic mindset and is renowned for being technically sharp. Scott’s practice covers all aspects of commercial law, with a strong emphasis on complex transactions and business co-ownership matters. Scott is focused on leading by example. He provides precise advice and tenaciously protects his clients.
Accredited Specialist in Commercial Law.
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Robert has a breadth of knowledge that is rarely seen in law firms. He is a practising lawyer, a qualified CPA and is currently completing an MBA. This intellectual platform allows Robert to solve complex business issues that other lawyers often do not even see. Outside of the office, you are likely to find Robert working on the family farm. As a commercial lawyer who understands the financial and practical realities of business on a deeper level, Robert truly is a needle in a haystack.