Treasury proposes civil penalties and other changes to unfair contract terms regime

Bizar Male

Among other proposals, a civil penalty regime is proposed for standard form contracts containing unfair contract terms which, if passed into law, would apply to an expanded class of contracts.

Treasury has released its long awaited exposure draft legislation set out in the Treasury Laws Amendment (Measures For A Later Sitting) Bill 2021: Unfair Contract Terms Reforms (Draft Bill) and commenced a public consultation seeking submissions by 20 September 2021.

These changes arise from the November 2020 meeting of the ministers for consumer affairs who identified concerns about the prevalence of unfair contract terms (UCTs) in standard form contracts and uncertainty about the scope of protections. They proposed changes to the UCT provisions in order to protect consumers and small businesses when agreeing standard form contracts.1

Implications for business

The Draft Bill represents a significant change in the way in which standard form contracts are defined and the remedial and enforcement outcomes available to courts and regulators if those contracts fail to meet the requisite consumer law standards.

The proposed changes would apply to new contracts made on or after the commencement date as well as existing contracts that are renewed or terms that are varied on or after the commencement date.

  • Are more of your contracts caught?: The Draft Bill expands the class of contracts that are covered by the unfair contract term provisions. It is important consider whether this expanded definition will apply to a greater number of your standard form contracts and increases your potential risk exposure under the Draft Bill.
  • Introduction of pecuniary penalties: The introduction of pecuniary penalties for UCTs and the availability of disqualification orders for individuals reinforces the need to ensure that your standard form contracts are compliant with the ACL and that customer facing staff are trained in and well aware of their consumer law obligations. The introduction of a pecuniary penalty regime is significant (under the current regime unfair terms are not enforceable). There is some inherent uncertainty as to when a provision will be found to be unfair. Businesses will need to grapple with this uncertainty and its consequences. The possibility of pecuniary penalties may require a reconsideration of relevant terms.
  • Implications of the rebuttable presumption: If a term used in a standard form contract has been declared by a court to be unfair, in a subsequent proceeding, any same or similar term will have a rebuttable presumption that is unfair. This will mean not just that a similar term in a different standard form contract by that party is unfair, but will also apply to similar terms by other suppliers in the same industry. Everyone should, therefore, be alive to and vigilant about UCT findings within their industry and be quick to take appropriate steps to minimise risk exposure.

What is the detail of the changes?

The Draft Bill would amend the Australian Consumer Law and the Australian Securities and Investments Commission Act. Summarised in the table below are the key changes to the UCT provisions:

Determining whether or not there is a standard form contract

The Draft Bill provides further clarity around the definition of a standard form contract by setting out matters the court must take into account when considering if a contract is standard form, including:

  • whether a party has entered into a contract that is the same or substantially similar to another contract entered into by that person and the number of times this has been done;
  • when determining whether a party was able to genuinely negotiate a contract, a court is to disregard instances where a party:
    • has negotiated minor or insubstantial changes to the terms of a contract;
    • is given the ability to select from a pre-determined range of terms within a contract; and
    • to another similar contract has been given an effective opportunity to negotiate the terms of that contract.

Exemptions

The Draft Bill makes clear if a law of the Commonwealth, a State or a Territory requires or reads in certain terms into a standard form consumer or small business contract then it cannot be an unfair contract term.

Consultation period

Treasury is consulting on the Draft Bill and submissions are open until 20 September 2021. There is no clear timeframe for consideration of the Draft Bill, nor is it clear that all of the proposed amendments will be passed into law. However, it is timely for businesses now to review their standard form contracts and consider the implications of the proposed changes on their business.

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