...and expansion to apply to more business contracts.
Written by Suzie Leask, Director and Claudia Simmons, Associate
After much anticipation, the draft reforms to unfair contract laws are finally here, introducing large financial penalties against both businesses and individuals, and expanding the regime to now apply to even more businesses and their business contracts.
On 23 August 2021 the Federal Government released the exposure draft legislation: Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Unfair contract term reforms (the Exposure Draft Bill) which aims to strengthen existing protections for consumers and small businesses against unfair contract terms.
The Exposure Draft Bill formally introduces the changes foreshadowed in our previous article and detailed below, making 2021 a critical year for contract law shake ups and a must review item on the Business Risk & Compliance agenda in order to avoid regulatory scrutiny, prosecution and penalties.
What does the Exposure Draft Bill propose?
The Exposure Draft Bill proposes a major overhaul to reform the Australian Consumer law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). It is designed to increase protection for a broader range of small business, subcontractors and service providers and reduce the prevalence of unfair terms in standard form contracts.
In addition, the Exposure Draft Bill introduces new civil penalty provisions prohibiting the use of unfair contract terms and expands the class of contracts and businesses that are captured by the unfair contract term provisions. The new financial penalties for unfair contract terms are significant (see below) and align with the penalties available under the ACL and Competition and Consumer Act 2010 (Cth).
As a result:
- Businesses will be exposed to increased regulator and public scrutiny in relation to unfair contract terms used in their contract dealings and will need to review their contracts regularly to ensure their terms are compliant and ‘fair’ under the new laws and pursuant to subsequent court decisions on similar unfair contract terms or industries;
- Small (and some medium) sized businesses and consumers will have added protections and likely increased negotiating power and confidence when entering into standard form contracts.
What are the key changes affecting businesses?
The key changes under the Exposure Draft Bill include:
1. Two new prohibitions:
The Exposure Draft Bill introduces two new prohibitions against:
a. Entering into a standard form contract which contains an unfair contract term;
b. Applying or relying (or purporting to) on an unfair contract term.
2. Pecuniary penalties:
Courts will be provided with the power to impose significant financial penalties for a contravention of the new prohibitions on proposing, applying or relying on an unfair contract term in a standard form contract
. The Exposure Draft Bill confirms that the new penalty regime will be:
3. Additional court powers and remedies:
- For a body corporate: the greater of $10 million, three times the value of any benefit of the conduct, or if that cannot be determined, 10% of the annual turnover of the party for the previous 12 months.
- For individuals: Individuals involved in the conduct face a maximum penalty $500,000.
Courts will be able to, on application by ACCC or ASIC (as applicable), make orders to:
a. (more flexible remedies
) impose new unfair terms-specific remedies, including orders appropriate to prevent or reduce loss or damage that may be caused by a court declared unfair term, with power to make orders to void, vary or refuse to enforce part of or all of a contract;
) issue injunctions in circumstances where a standard form contract contains a term deemed by the court to be unfair, including injuncting a person from entering into future contracts that contain the same or similar unfair term;
c. (prevent or reduce loss or damage to others not a party
) prevent or reduce loss or damage which may be caused to any person (whether or not party to the proceedings) by a term in an existing contract that is similar to a term that has been declared unfair (including injunctions restraining the person from applying or relying on similar terms), whether or not the future or existing contract is identifiable when the Court makes the orders.
This ability to make orders with application to similar terms and contracts that are not the subject of the legal proceedings is significant.
This could be used to require a business to amend an unfair term used in its standard form contract across all of its customers, even if only one customer sought the unfair contract term declaration from the court.
4. Public notices and disqualification:
Issue public warning notices, adverse publicity orders, and personal orders disqualifying an individual from managing a corporation.
5. A rebuttable presumption:
Creating a rebuttable presumption for unfair contract terms that have been found to be unfair that are subsequently included in similar circumstances.
Application to more businesses and more contracts
Critically, the Exposure Draft Bill will significantly expand the number of businesses and contracts that are covered by the new unfair contract laws and penalties by:
1. Increasing and expanding the ‘small business’ threshold.
Under the new laws, a contract will be a ‘small business’ contract if at least one of the parties is a business that satisfies either or both of the following conditions:
a. employs fewer than 100 persons
(a major increase from the current 20 person limit). This number does not include casuals unless employed on a regular and systematic basis, while part-time employees are counted as an appropriate fraction of a full time equivalent;
b. has an annual turnover of less than $10million
in the last income year that ended at the time or before the contract was entered into.
2. Removing the contract value threshold
: Currently, contracts with an upfront price payable exceeding $300,000, or $1million if more than a 12 month term, are not subject to the unfair contract terms regime. This price threshold will be removed under the new legislation.
Finally, the Exposure Draft Bill also provides further clarity on the unfair contract term provisions by:
a. Exempting certain clauses
from the unfair contract term provisions;
b. Ensuring that repeat usage
of contract templates is taken into account by a Court when determining whether a contract is a standard form contract;
c. Ensuring that small business had an effective opportunity to negotiate
the contract; and
d. Reinforcing that remedies for non-party consumers
also apply to non-party small businesses.
When will the changes commence?
The Government has invited submissions on the new draft legislation, which is open for comment until 20 September 2021.
The Exposure Draft Bill proposes that the unfair contract term changes will apply to new or renewed standard form contracts from the date of commencement, being six months after the Bill receives Royal Assent.
ABLA will provide a further update to let you know when these new laws come into effect, so please ensure you are on our mailing list. Head to ablawyers.com.au and click the ‘Subscribe’ button at the bottom.
What should businesses do now?
Businesses should take action now to obtain advice and review their contracts and terms of business to ensure that they are compliant with the proposed changes and remove any ‘unfair contract terms’. The expanded application means that your business might now be affected and there are new significant financial penalties at stake including for individuals, not to mention unwanted regulator attention and reputational damage. Small businesses should consider the standard form contracts they regularly sign in their commercial dealings and whether the changes can be utilised to obtain increased bargaining power and a fairer deal.
Taking a proactive approach to contracts and compliance now will provide you with the maximum protection moving forward and where possible, ensure that your business avoids scrutiny by regulators and subsequent financial penalties.
Get in touch
If you would like to know more information about these key changes, are concerned about your contractual terms and compliance with the new changes or want to take the opportunity to update your terms to ensure you have the maximum protection at law and minimise risk of prosecution and penalties, contact our Commercial Team of the Year 2020 on 1300 565 846 or firstname.lastname@example.org for a confidential discussion or attend our upcoming half day Commercial Contracts Training to learn more.