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Unfair Contract Terms - Could the Toothless Tiger be Getting Some Teeth?

Dec 2020

The Government is proposing reforms to the Unfair Contract Term (UCT) Regime which will likely mean more businesses will be protected by the UCT regime (and more contracts covered).

The Unfair Contract Term (UCT) regime protects consumers and small businesses from unfair contract terms in standard form contracts by making the unfair term unenforceable. However, limitations in the regime have become increasingly apparent.

Therefore, following a Treasury report, Federal and State / Territory ministers have agreed on proposed reforms, which include: widening the application of the UCT regime by broadening the definition of ‘small business’, removing the contract price threshold, providing clarity on what constitutes a standard form contract and expanding the available remedies.

This article explores the possible consequences for your business if the proposed reforms are enacted into law.

Why the change?

The current regime has been somewhat of a toothless tiger as unfair contract terms remain prevalent in standard form contracts. This is mainly because a person seeking to prove that a term is unfair must apply to a regulatory body to represent their interests (for example, ACCC, ASIC, or the relevant fair-trading authority). Most consumers and small businesses do not have the resources to pursue matters themselves and therefore, rely on the capability and willingness of the relevant bodies. Furthermore, the most severe outcome is finding the unfair contract term unenforceable and ‘void’ for that contract (there are no penalties or fines imposed), and the term may continue to be used in the business’ other contracts.

Removal of minimum contract price requirement

The UCT regime applies to standard form contracts for the supply of goods or services (or an interest in land) where one of the parties is a consumer or a small business and where the price payable under the standard form contract does not exceed $300,000 (or $1,000,000 if the contract runs longer than 12 months).

The proposed reforms seek to remove this price threshold entirely. Consequently, larger contracts could fall within the UCT regime’s reach and certainty would be provided for those contracts where upfront values may not be certain at the outset.

Changes to who is protected by the UCT legislation

Currently, the UCT legislation protects consumers and, since 2016, small businesses. Small businesses are those employing fewer than 20 persons. Under the proposed reforms, the definition of small business will be expanded to include those businesses employing fewer than 100 people and/or having an annual turnover of $10 million or less. This will significantly broaden the ambit of businesses protected by the regime.

Clarity as to what constitutes a “standard form contract”

“Standard form contracts” are not clearly defined. Rather, the legislation provides a list of factors that may be taken into account in determining whether a contract is a “standard form contract”. Broadly, a standard form contract will usually be a contract that is not subject to negotiation and is offered on a ‘take it or leave it’ basis.

Given the lack of clarity as to what exactly amounts to a “standard form contract”, the reforms seek to clarify this by providing certainty on whether factors such as repeated usage of a contract template and whether there was an ‘effective opportunity to negotiate’ define a standard form contract. These factors have not yet been confirmed, however, we anticipate that opportunities for a small business to negotiate minor changes to a contract that do not alter the intent and essence of the agreement may not constitute an ‘effective opportunity to negotiate’.

Changes to Unfair terms considerations

Unfair terms are those which:

• would cause a significant imbalance in the parties’ contractual rights and obligations;
• are not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
• cause detriment (financial or otherwise) to a party if relied upon.

As an exception to what amounts to an ‘unfair’ term, the reforms seek to allow certain clauses that include ‘minimum standards’ or other industry-specific requirements contained in relevant Commonwealth, State, or Territory legislation to be exempt from the protections.
The planned changes also incorporate a new ‘rebuttable presumption’ that a contract term is unfair if, in a separate instance, a term much the same or substantially similar was used by the same company (or even in the same sector) and declared to be unfair by a court.

Changes to Remedies

The suggested reforms allow for a more flexible, and broader range of remedies to be available where there is an unfair term in a contract. Under the proposed changes, the use of an unfair contract term in a contract will be prohibited, with courts able to issue a fine to businesses found to have included an unfair term (currently, no penalties apply for breaching the UCT regime). This change is likely to serve as a greater deterrent compared to the status quo.
Part of the increased flexibility in remedies is to allow unfair contract terms to be varied if the court finds doing so may be more appropriate than making the term automatically void. This facilitates greater discretion available to courts in determining the best outcome for the aggrieved party.
The reforms also seek to ensure that small businesses negatively impacted by unfair contract terms in contracts to which they are not a party would have access to any remedies sought on their behalf by a regulator.

Material in this article is available for information purposes only and is a high-level summary of the subject matter. It is not, and is not intended to be, legal advice. You should first obtain professional legal advice prior to taking any action on the basis of any information contained in this article. This article is copyright. For permission to reproduce this article please email Hazelbrook Legal: enquiry@hazelbrooklegal.com

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