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The federal government is to develop exposure draft legislation that will make it unlawful to have unfair contract terms, which will come with a civil penalty if breached.
While protections for unfair contract terms (UCTs) have been in place for 10 years for consumers and four years for small business (major banks agreed to eliminate UCTs from their SME lending contracts in 2017), the government has noted that there are still prevalent instances where UCTs still exist.
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Indeed, stakeholders responding to a consultation on enhancements to UCT protections last year suggested that improvements were needed to improve clarity on the application of, and accessibility to, the UCT protections.
As such, following discussions at the Consumer Affairs Forum last week, the Commonwealth and state and territory governments have agreed to strengthen existing unfair contract term protections in the Australian Consumer Law, by:
- making unfair terms unlawful and giving courts the power to impose a civil penalty;
- providing more flexible remedies to a court when it declares a contract term unfair by: giving courts the power to determine an appropriate remedy, rather than the term being automatically void; clarifying that the remedies available for ‘non-party consumers’ also apply to ‘non-party small businesses’; and creating a rebuttable presumption provision for UCTs used in similar circumstances;
- increasing the eligibility threshold for the protections from less than 20 employees to less than 100 employees, and introduce an annual turnover threshold of less than $10 million as an alternative threshold for determining eligibility;
- removing the requirement for the upfront price payable under a contract to be below a certain threshold in order for the contract to be covered by the UCT protections;
- improving clarity around the definition of standard form contract, by providing further certainty on factors such as repeat usage of a contract template, and whether the small business had an effective opportunity to negotiate the contract; and
- enabling certain clauses that include ‘minimum standards’ or other industry-specific requirements contained in relevant Commonwealth, state or territory legislation to be exempt from the protections.
“These enhancements will help reduce the prevalence of UCTs in standard form contracts, providing a fairer and more efficient allocation of risk in these contracts, and will improve consumer and small business confidence when entering into standard form contracts,” a joint communique from the Minister for Consumer Affairs reads.
The above proposals will be applied to small business and consumer contracts for:
- goods, services and the sale or grant of an interest in land regulated under the Australian Consumer Law (ACL) and;
- consumer and small business contracts for financial products and services (regulated under mirror provisions in the Australian Securities and Investments Commission Act 2001 [ASIC Act]). The ASIC Act provisions will extend to insurance contracts from 5 April 2021.
Treasury has now said it will develop exposure draft legislation, which will provide a further opportunity for stakeholders to comment on the detail of the reforms.
Assistant Treasurer and Minister for Housing Michael Sukkar MP commented: “The Morrison government has secured the agreement of state and territory Consumer Affairs Ministers to strengthen protections for consumers and small businesses from unfair contract terms.
“These reforms will improve consumer and small business confidence when entering into contracts.”
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, welcomed the national agreement to strengthen protections for small businesses from UCTs, saying: “The government has clearly listened to the concerns my office has long held in relation to the impact of unfair contract terms imposed on small businesses by big businesses.
“Importantly, these reforms will ensure unfair contract terms are illegal and the courts will have the power to levy penalties for breaches.
“Equally, we welcome the expansion of the definition of small business to under $100 million turnover or up to 100 employees, which means 99 per cent of businesses will be afforded these protections.
“The removal of the requirement for a contract to be below a certain threshold also represents significant progress for small businesses,” Ms Carnell said.
While the ASBFEO generally welcomed the reforms for their ability to provide SMEs with more confidence to enter into a contract with a larger business, she said it was “disappointing that unfair contract terms will still need to be decided by the courts”.
“This has proven to be a significant barrier for small business as pursuing legal action is a costly, stressful and time-consuming exercise,” the ASBFEO said.
“That’s why my office continues to recommend giving the regulators additional powers to penalise businesses found to have imposed unfair contract terms on a small business.
“It’s also crucial these reforms apply to government contracts, which often impose unfair contract terms on small businesses.
“We look forward to seeing draft legislation to ensure these necessary reforms come to fruition as a matter of urgency,” Ms Carnell said.
[Related: ASIC takes banks to court over ‘unfair’ loan terms]
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