Big changes ahead for the unfair contract term laws

11 Nov 2020

The laws of unfair contract terms (UCT) have been a hot topic in 2020. The ACCC has been actively enforcing the law and calling for penalties to apply.

Earlier this year, legislation was passed to extend them to insurance contracts covered by the Insurance Contracts Act 1984 (Cth).  This extension, which will take effect from 5 April 2021, will dramatically increase the reach of the UCT laws by extending them to general insurance, such as car insurance, travel insurance, life insurance and house and contents insurance.  But it doesn't end there! 

On 6 November, Federal and State Ministers for fair trading and consumer protection agreed to extend the UCT laws even further and more importantly, impose serious consequences for the use of a UCT. 

What is a UCT?

An explanation of the UCT laws can be found in a previous Insights article.  For now, it is important to note the following aspects of the UCT laws as they currently stand:

  • The UCT laws only apply to "consumer contracts" and "small business contracts" provided they are also standard form contracts.
  • Currently – and this is about to change – a court may not impose a penalty for using a UCT.  Only a court has the power to determine whether a term is a UCT and where this is the case the UCT will automatically be declared void and unenforceable.  While such a finding could trigger compensation orders in favour of those who have suffered loss due to the void UCT (for example, people who have paid money under a void UCT), the court cannot impose any penalty for using the UCT.  This is different to when a person engages in unconscionable conduct or makes a false representation (often alleged as conduct associated with the inclusion of a UCT).  In those cases, a penalty may be imposed by a court in addition to compensation orders.  The absence of penalties for UCTs perhaps reduces the likelihood of people complying with the UCT laws.

What's going to change?

Six key changes were recently announced. 

Small and medium businesses can use the UCT Laws 

The first is that the definition of a "small business contract", which must comply with the UCT laws, is about to significantly expand. 

Currently, a small business contract is a contract where at least one party is a business that employs fewer than 20 people and the upfront price payable under the contract is below certain monetary thresholds: $300,000 for a contract of less than one year's duration and $1,000,000 for a contract that is one year or longer in duration. 

This definition will change so that:

  • there is no limit on the upfront price payable under the contract; and
  • businesses will be "small businesses" and able to rely on the UCT laws if:
    • they employ up to 100 employees (instead of 20) or
    • the annual turnover of the business is not more than $10 million.

This amendment will greatly expand the reach of the UCT laws to a broader field of business contracts and allow more small businesses (and some not-so-small businesses!) to avail themselves of the protections in the UCT laws.

Civil penalties can be imposed

The second and most important change is that potentially large civil penalties will be introduced for using UCTs.  So far, there has been no announcement about the quantum of these penalties or how they will be calculated, but it is possible the existing penalties for contraventions of the Australian Consumer Law will apply, that is, a maximum penalty will be available of the greater of A$10m per contravention, three times the value of any benefit from the contravention and (if the value of the benefit cannot be determined) 10% of Australian turnover in the 12 month period prior to the contravention.    

Remedies will be expanded

The third change is that a UCT will not automatically be void and instead a court will have the power to determine an appropriate remedy for the use of the UCT other than declaring it to be void.

Proof of unfairness will be easier

The fourth change is that a rebuttable presumption will be introduced for UCTs used in similar circumstances.  There will be a rebuttable presumption that a term is unfair if, in a separate case, the same or a substantially similar term was used by the same entity or in the same industry sector and declared by a court to be unfair.  Rebuttable presumptions already exist in the UCT laws; for example, there is a rebuttable presumption that a contract is in standard form.  The amendments will add another presumption that assists claimants.

The fifth change is that the definition of a standard form contract in the UCT laws will be clarified.  Currently, there is no precise definition of a standard form contract in the UCT laws.  Instead, a court is directed to a series of factors that it must consider when deciding whether a contract is in standard form.  One of these factors is whether a party was given "an effective opportunity to negotiate the terms of the contract".  This will be amended so that certain conduct is not treated as an effective opportunity to negotiate.  The amendments will also include "repeat usage" of a contract as one of the factors that a court must consider when determining whether a contract is in standard form. 

The final change will exempt from the UCT laws certain clauses that include "minimum standards" or other industry-specific requirements contained in relevant Commonwealth, State or Territory legislation.

When and how will these changes be implemented?

These changes will be implemented by legislative amendments to the Australian Consumer Law, Australian Securities and Investments Commission Act 2001 (Cth) and relevant State and Territory legislation.  At this stage, we don't know when they will be implemented.  We don't have draft legislation for the amendments either.  The draft legislation will contain valuable details on the precise nature of the amendments.

What should I do now?

Although we don't know when the amendments will take effect, it is advisable to start getting ready now and review your standard terms. 

If your business uses standard form contracts, it would be advisable to see whether any of them will now be captured by the expanded definition of a small business contract. 

It would also be advisable to review all standard form contracts used by your business which may also be "consumer contracts" or small business contracts, including under the expanded definition of a small business contract.  This is because there is now the spectre of penalties for using a UCT.

Also, it is important to keep watching this space for further developments, such as the release of draft legislation and a timetable for the amendments. 

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.