Shift in enforcement model increases risk

7 min read


Federal Treasury has released exposure draft legislation and explanatory materials for a major suite of proposed reforms to unfair contract terms law, which will put a heavy burden on businesses. The Government is seeking feedback on the changes, with responses due by 20 September 2021.

Key takeaways 

  • The proposed reforms represent a fundamental shift in the enforcement model for unfair contract terms (UCTs) and increase regulatory risk significantly.
  • Entering a contract in which you proposed a UCT, or relying on UCTs, would be unlawful and expose you to the risk of serious civil penalties. Where a term is found to be unfair, the same or a substantially similar term used by the same entity, or in the same industry, would be presumed to be unfair.
  • A broader range of small business contracts will be captured, as the financial thresholds are removed, and the definition of ‘small business’ is expanded to capture parties that employ fewer than 100 people or have an annual turnover of less than $10 million.
  • If these reforms are introduced, you should check the terms of your standard form agreements with consumers and small businesses, and monitor court decisions involving parties in your industry.

Background

Standard form contracts are relied upon in many industries as a cost-effective and efficient method of conducting business. Where a standard form contract is entered into with a consumer or a small business, depending on certain headcount and financial thresholds, it is subject to the UCT regime.

The regulation of UCTs has been in place for at least a decade, following the July 2010 introduction of protections for consumers as part of a suite of consumer law reforms.

In November 2016, the regime was extended to cover standard form contracts with small businesses.

Under the current regime, a court can declare a term in a standard form consumer contract or small business contract to be unfair and void if the clause:

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

The proposed reforms follow a November 2018 review of the UCT regime, which found that it did not provide strong deterrence and that the regime ‘created ambiguity, uncertainty, and practical difficulties for businesses to comply with the law.’ The Draft Bill was developed by Treasury after a consultation process on potential reforms, and agreement between federal, state and territory consumer affairs ministers to strengthen the UCT protections.

The proposed changes also reflect concerns raised by the ACCC, which has been advocating for UCTs to be unlawful and liable to attract civil penalties.

Further details of the proposed changes

Prohibitions

The Draft Bill proposes two separate prohibitions:

  • a prohibition on entering a contract in which you proposed an unfair term in a standard form consumer or small business contract; and
  • a prohibition on applying or relying (or purporting to apply or rely) on an unfair term of a standard form consumer or small business contract.

Each prohibition can be contravened multiple times in a single contract, as each individual unfair term in each contract with a consumer or small business is considered a separate contravention. This could result in a single unfair term giving rise to thousands of potential contraventions. 

Penalties and other possible remedies

The Draft Bill provides that UCTs would attract the same penalties that apply to other Australian Consumer Law contraventions. Namely, each contravention of the prohibitions could attract a penalty of $10 million, three times the benefit of the conduct or 10% of a company’s turnover.

The introduction of the court’s ability to enforce pecuniary penalties, as currently proposed, carries a risk of regulatory overreach. In circumstances where there is limited practical guidance about when a term will or will not be unfair, which will vary depending on the specific circumstances of a contract, penalties of this magnitude go beyond what is necessary to achieve compliance.

The regime should be amended to include a warning-based system whereby pecuniary penalties can only be applied in circumstances where a business has failed to make necessary amendments to address the concerns of the relevant regulator.

Additional remedies proposed by the Draft Bill include a court order to:

  • vary, or refuse to enforce, part or all of a contract, if appropriate to prevent or reduce loss or damage;
  • prevent a term that is the same as, or substantially similar to, a term that has been declared unfair from being included in any future standard form contracts by a respondent;
  • upon the application of ACCC/ASIC, prevent or reduce loss or damage that may be caused in relation to a term that is the same as, or substantially the same in effect to, a term that has been declared unfair; and
  • issue public warning notices and disqualify a person from managing a corporation;
Rebuttable presumptions

The Draft Bill includes a presumption that a term is unfair if a substantially similar term has been found to be unfair in previous court proceedings. This presumption is rebuttable and applies where the term is proposed by the same person who proposed the original unfair term, or where the term is part of a contract that is in the same industry as the contract that contained the original unfair term.

The introduction of a rebuttable presumption is problematic for a number of reasons. Primarily, it does not reflect the fact that an assessment of whether a term is unfair is highly fact specific and dependent on the context within which the term is used.

The rebuttable presumption will be particularly onerous in circumstances where it applies:

  • to one person who operates across multiple industries, as different industries have different nuances that change the factual analysis of whether a term is unfair; and
  • to other parties within the same industry, as it does not take into account the legitimate interests of different parties, which may cause a term to be fair in some circumstances and unfair in others.

Further, the amendment would effectively reverse the burden of proof onto business to prove that the term in question is not unfair. This is a significant departure from ordinary principles of civil litigation, particularly proceedings seeking civil penalties, which require regulators to satisfy the relevant standard of proof having regard to the nature of a cause of action and gravity of the matters alleged.1

Standard form contract factors

In relation to the factors to be considered in determining whether a contract is a standard form contract, the Draft Bill:

  • adds ‘repeated usage of a contract’ as a relevant factor because standard form contracts are used repetitively with the same or similar terms;
  • clarifies that when determining whether a party was able to genuinely negotiate a contract, a court is to disregard instances where it has negotiated minor or insubstantial changes to the terms of a contract; and
  • states that the court is also to disregard that a party to another similar contract has been given an effective opportunity to negotiate the terms of that contract, since a small subset of customers being able to negotiate a contract should not be extrapolated across a broader group of customers.
Contract thresholds

The proposed amendments expand the scope of small business contracts subject to the UCT regime.

The Draft Bill removes the upfront contract value threshold for the definition of a ‘small business contract’. This means that, provided one party to a contract is a ‘small business’, the contract entered into by the parties will be covered regardless of the upfront price payable under the contract.

In addition to removing the financial threshold, the Draft Bill expands the definition of ‘small business’. The amended definition requires that one party to a contract is a business that either:

  • employs fewer than 100 people; or
  • has an annual turnover of less than $10,000,000 for the previous income year.

Implications

The proposed amendments significantly increase the regulatory risk associated with UCTs.

UCTs will carry civil penalties. This is a heavy handed approach, given the inherent uncertainty in determining whether a term is unfair.

The introduction of a rebuttable presumption is a particularly problematic development. The courts have confirmed that the assessment of whether or not a term is ‘unfair’ is fact specific, and depends on the overall context of the agreement. Further, the relying party’s commercial reasons for including the term are relevant to that assessment. Applying a presumption to terms used across an industry is not consistent with the courts’ current approach.

The rebuttable presumption will place a heavy burden on businesses, by requiring maintenance of thorough records of contracts, and monitoring of UCT decisions within similar industries, to ensure that unfair terms are removed from, or not included in, standard form contracts.

If these reforms are introduced, parties are advised to check the terms of their standard form agreements with consumers and small businesses, and also monitor court decisions involving parties in their industries.