Earlier this month, and in an announcement that has been several years in the making, the Commonwealth and state and territory consumer affairs ministers met at the Consumer Affairs Forum and agreed to strengthen Australia's existing unfair contract terms (UCT) regime to provide further protection for small businesses when entering into standard form contracts.

The UCT regime will be reformed by the introduction of new legislation to be drafted and released for consultation next year, with strong civil penalties on the horizon for non-compliance.

Current state of play

The current regime under Part 2-3 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA) has been in force since November 2016 and applies to standard form contracts that are either consumer contracts or small business contracts.  E.g. ‘take it or leave it' standard form contracts.

A consumer contract is a contract where at least one party is an individual who acquires goods or services wholly or predominantly for personal, domestic or household use.  A small business contract is a contract where at least one party is a small business (20 or less employees) and where the upfront contract value is less than $300,000, or less than $1 million for contracts with a term of 12 months or longer. 

The CCA does not define what a standard form contract is, and it is determined on the facts, such as whether one party was required to ‘take or leave' the contract or whether they were able to effectively negotiate the contract, and whether the contract takes account of the specific circumstances of the transaction or the parties.  Consumer and small business contracts are presumed to be standard form contracts unless it can be shown otherwise.

UCTs under the current regime are not unlawful, but may be void by a court or tribunal.  This relies on small businesses being aware of their rights and being willing and able to enforce them.  There are currently no penalties for businesses who include UCTs in their standard form contracts.  Companies who have been found to have UCTs in their contracts have been required to remove them, but have not been subject to any penalties for breaching the UCT provisions.

A contract term is unfair if:

  • it would cause a significant imbalance in the parties' rights and obligations arising under the contract;
  • it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Common UCTs include terms that permit one party but not the other to:

  • avoid or limit their obligations under the contract;
  • terminate the contract;
  • penalise for breach or termination of the contract;
  • vary the terms of the contract;
  • renew or not renew the contract;
  • vary the price payable without the other party being able to terminate; and
  • unilaterally determine whether the contract has been breached, or to interpret its meaning.

What is proposed?

The proposed amendments to the UCT regime, which aim to reduce the prevalence of UCTs and address non-compliance, will come despite lobbying from large businesses, who warned any changes would increase red tape and raise costs for large companies. 

The proposed amendments will:

  • make UCTs unlawful;
  • give courts the power to impose a civil penalty (which has not yet been established), as well as providing more flexible remedies when they declare contract terms unfair;
  • expand the definition of small business to those with less than 100 employees or an annual turnover of less than $10 million;
  • remove the requirement for the upfront price payable under a contract to be below a certain threshold;
  • improve clarity on when the protections will apply, including on what is a ‘standard form contract', and whether a small business had an effective opportunity to negotiate the contract; and
  • exempting certain clauses that include ‘minimum standards' or industry-specific requirements contained in legislation.

The proposed amendments follow the expansion of the UCT regime to insurance contracts which are subject to the Insurance Contracts Act 1984, which is due to come into effect from 5 April 2021.  While certain insurance contracts are already governed by UCT regime (for example, private health insurance contracts), the amendments will extend the regime to car insurance, travel insurance, life insurance and house and contents insurance policies, provided they are standard form contracts that are either consumer contracts or small business contracts.  The practical effect will be that all contracts of insurance, except for particular contracts providing medical indemnity cover, will be subject to the UCT laws from 5 April 2021.

What's next?

The UCT regime shake up is intended to encourage all businesses to review their contracts and remove clauses which they may have otherwise retained (and continued to receive the benefit from) until the other party or the ACCC challenged the terms in court.

While the amendments are not likely to come into effect until the second half of 2021, the ACCC has increased action in this area recently.

Agreements caught by the UCT provisions include supply agreements, franchise agreements, finance contracts and retail leases.  We recommend having your existing contracts reviewed and amended ahead of the regime change to avoid what are likely to be significant penalties for non-compliance.  Early identification of UCTs is the best remedy to minimise exposure to the risk of a claim.

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