Time to revisit your contracts: Significant expansion of unfair contract term laws announced

Treasury has recently released a highly anticipated draft bill proposing a number of significant reforms aimed at strengthening protections for consumers, small businesses and landlords in relation to unfair contract terms (UCTs).

The Treasury Laws Amendment (Measures For A Later Sitting) Bill 2021: Unfair Contract Terms Reforms (Exposure Draft Bill) seeks to amend the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to clarify the UCT regime, expand its scope and strengthen its enforcement. Significantly, it introduces a financial penalty payable for prohibited use, application or reliance of a UCT, and increases the number of small business contracts to which these laws will apply.

We discuss the backdrop to the proposed reforms, the proposed changes and the practical implications of these changes below.

Background and UCT refresher

Generally speaking, the existing UCT regime applies to “standard form contracts” issued to consumers and small businesses in relation to goods, services and in relation to financial products or services (under the ASIC Act).

Leases, licenses and serviced office contracts may also fall within the scope of the UCT’s regime –notwithstanding they may also be governed by focused state legislation (such as the Retail Shop Leases Act 1994 Qld). This was demonstrated in Australian Competition and Consumer Commission (ACCC) v Servcorp Ltd [2018] FCA 1044 where the ACCC successfully sought declarations that terms within standard contracts for serviced offices were unfair.

UCT reforms in early 2021 saw the regime extend its protections to insurance contracts, subject to the Insurance Contracts Act 1984 (Cth).

A term is considered unfair if it:

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

All three limbs of the unfairness test must be proven for a term to be deemed unfair. If a court or tribunal finds a term unfair, the term will be void (i.e. not enforceable or binding on the parties). However, a court or tribunal cannot currently impose a penalty for the use of the term.

The types of clauses that the UCT regime can capture include:

• a unilateral right to vary the terms of the contract (such as terms relating to price);
• a unilateral right to terminate the contract for convenience;
• broad limitation of liability clauses favouring one party;
• broad indemnities favouring one party; or
• automatic renewal clauses.

A recent example can be seen in Australian Securities and Investments Commission v Bank of Queensland Limited [2021] FCA 957, where the Federal Court found several terms in various Bank of Queensland (BoQ) small business loan contracts to be unfair. Among other terms, these included unilateral variation clauses where a borrower was given no notice or opportunity to exit the contract without penalty, and indemnification clauses where a customer had to indemnify BoQ for losses caused even by BoQ’s own mistake, error or negligence.

Since the introduction of the UCT regime in 2010, it has been subject to numerous reviews. The long-awaited Exposure Draft Bill aims to implement reforms agreed to late last year at a meeting of the Legislative and Governance Forum of Consumer Affairs, which followed from a review in 2018 and a period of public consultation throughout 2019 and 2020.

What are the key reforms?

In summary, the proposed changes are:

• strengthen enforcement and remedies by:
  • prohibiting UCTs and introducing a civil penalty provision for breaches of this prohibition
  • introducing a rebuttable presumption
  • providing more flexible remedies.
• expand the scope of the UCT regime by:
  • expanding the definition of “small business” contract
  • removing the contract value threshold.
• clarify the application of the UCT regime by:
  • setting out the matters a court must consider when determining what a “standard form contract” is
  • excluding “minimum standard provisions”.

See our table below for a more detailed look at each proposed change.

Commencement

Public consultation on the Exposure Draft Bill closed on 20 September 2021.

While it is uncertain when these significant changes will come before Parliament, if passed, the Exposure Draft Bill provides that these changes will commence six months after the Bill receives royal assent (Commencement Date). The expanded UCT regime will apply to:

• standard form contracts entered into at or after the Commencement Date
• existing standard form contracts renewed at or after the Commencement Date
• terms in an existing standard form contract that are varied at or after the Commencement Date.

While the Bill is yet to be passed and does provide a six-month grace period, we suggest organisations start reviewing all standard form consumer and small business contracts that these changes may capture.

Practical considerations

As we have discussed, if passed, the new regime will apply to a broader class of contracts and carry serious consequences if breached. 

Additionally, it is anticipated that regulators, such as the ACCC and ASIC, will be keen to make an example of offending parties once these changes are in effect. For these reasons, organisations should prepare accordingly by reviewing all applicable contracts to assess compliance and to avoid potential penalties. 

This can include reviewing documents such as standard terms and conditions of sale, loan agreements, order forms and rental agreements.

Furthermore, landlords should consider the impact the UCT regime has on its negotiation process. Given it is common for commercial and retail landlords to adopt standard leasing terms to provide efficient negotiation and consistency across centres, a prudent landlord should:

• give tenants the opportunity for a genuine and meaningful negotiation, rather than limiting negotiation to minor or insubstantial terms or simply giving the party the opportunity to select from a range of pre-determined provisions 
• keep records of negotiations with tenants
• review any standard leases or standard terms documents to ensure continuing compliance with key industry legislation and the Exposure Draft Bill (if passed).

Landlords should also pay particular attention to:

• automatic renewals of the term
• make good provisions following the termination or expiry of the lease
• the ability to unilaterally change the centre rules which are binding upon the tenant.

Subject to the quantity and complexity of an organisation’s contracting practices and procedures, reviewing standard documents can often be a timely and complex task, so it is prudent to start sooner rather than later. While the Bill is yet to come before Parliament, the changes have previously received bipartisan support from Commonwealth, state and territory consumer ministers and are expected to proceed.

If you need advice or assistance reviewing your standard form contracts, please speak to us or contact us here.

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Amy Pun

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