Many businesses will be familiar with the existing ‘unfair contract terms’ regime in the Australian Consumer Law (the ACL). Draft legislation has been circulated which will implement big changes, including potential penalties of $10 million or more. Businesses will likely need to review many of their contract terms, as the new regime will be much broader and carry much more serious consequences if breached.
The current regime is contained in the ACL and, for financial products and services, in the Australian Securities and Investments Commission Act 2001 (Cth).
It applies to a contract if the following three criteria are met:
There is no definition of ‘standard form contract’ but when deciding if a contract fits this description, a court must consider factors such as any bargaining power imbalance between the parties, whether one party prepared the contract before discussing the transaction with the other party and whether there was an effective opportunity to negotiate the terms.
The types of clause that might be considered unfair include:
Late last year the relevant Commonwealth, State and Territory consumer affairs ministers agreed to strengthen the existing regime – see their announcement on 6 November 2020.
An exposure draft of the legislation to give effect to the changes has now been released.
The key changes the draft legislation would implement are:
For a company, the maximum amount of the penalty will be the greater of:
For a person other than a company (e.g. a sole trader or partnership), the maximum penalty will be $500,000.
Further, each unfair contract term in the same contract will give rise to a separate breach of the law and at least theoretically, could trigger a separate penalty.
This means the onus will be on all participants in an industry to monitor any unfair contract term cases the courts decide against their competitors, and ensure they don’t engage in similar practices.
While we’ve summarised the major changes above, the draft legislation contains a number of other ‘tidy-ups’ intended to improve and bolster the regulation of unfair contract terms.
For example, the draft legislation clarifies that the following contract terms will not be subject to the unfair contract terms regime:
If the above is a bit hard to follow, the draft legislation gives the following example which may assist. Assume a State law provides that, if a retail lease contains a provision for termination on the ground of proposed demolition of the building containing the leased premises, then provisions set out in the State law are taken to be included in the lease. Exception (ii) above covers the provisions that are set out in the State law and taken to be included in the lease. Exception (iii) above covers inclusion of the provision for termination, since it has the result that the provisions set out in the State law are taken to be included in the lease.
While this may sound a little technical, it will clear up some areas of uncertainty that have been vexing certain industries for a considerable time.
The exposure draft legislation is open for public comment until 20 September 2021.
On that basis, our best guess is that the proposed changes, incorporating any tweaks that might arise from the public consultation process, will be legislated in the first half of 2022.
The new regime will take effect six (6) months after the legislation is passed and receives the Royal Assent. It will then apply to standard form contracts that are new, amended or renewed (but otherwise, it will not apply to existing standard form contracts). That means businesses will have six (6) months to review and amend all of their standard form contract terms – which is not a long period of time given the number and complexity of contract templates that are likely to need review in some businesses.
Businesses need to be aware that significant change is coming, and prepare for the need to establish a project to review their ‘standard form’ agreements.
Our experience is that there are a great many agreements in the marketplace that contain terms that are arguably ‘unfair’, however businesses are not overly concerned about them since the existing regulatory regime has not armed regulators to pursue this issue vigorously.
This is precisely why the changes are being introduced. The amended regime is designed to have ‘teeth’ and is intended to give businesses a strong incentive to comply. Once the new regime takes effect, we expect that regulators such as the ACCC will be keen to trawl the marketplace for offending contracts and to make public examples of businesses that don’t have their houses in order.
Therefore, businesses should start planning for the fact that they will need to implement a project to:
For a large business that may use numerous template agreements and sets of standard terms across its operations, this could be a substantial project and the business will need to consider whether to resource it internally or to engage external lawyers.
Interestingly, the Regulation Impact Statement that the consumer affairs ministers considered when deciding to make the changes includes an estimate of the legal costs a business might need to incur to prepare for the changes. It states that an external legal review and amendment of a simple contract could cost between $3,000-10,000, while more complex contracts could cost slightly more. Based on our experience, these figures seem about right.
Please contact us if you’d like any assistance preparing for the introduction of the new requirements.
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David Smith, Partner