Fairly good? Bill introduced to amend Australia’s unfair contract term laws

On 28 September 2022, the Federal Government introduced the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022 into Parliament. When passed, this Bill will result in significant changes to the unfair contract terms laws that regulate consumer and small business contracts.

The Bill proposes changes to two Acts:

• The Competition and Consumer Act 2010 (CCA), including Australian Consumer Law (ACL) in Schedule 2 of the CCA – for all consumer and small business contracts other than consumer and small business contracts that are financial products or contracts for the supply or possible supply of services that are financial services.[1]
• The Australian Securities and Investments Commission Act 2001 (ASIC Act) – for all consumer and small business contracts that are financial products or contracts for the supply, or possible supply, of services that are financial services.[2]

In preparation for the changes, businesses that enter standard form contracts with small businesses and consumers need to:

• review their standard form contracts offered to small businesses to ensure they are not unfair;
• review their contracting and enforcement processes to determine the extent to which their legal risks will increase as a result of the changes; and
• ideally, take steps to mitigate any increased legal risks.

What does the Bill do?

This note considers the following key changes proposed by the Bill:[3]

• Creation of new civil penalty provisions for proposing unfair contract terms.
• Expansion of the class of contracts that are covered by the unfair contract term laws by changing the upfront price, employee number and annual turnover thresholds.
• Increasing a court’s injunctive powers.
• Expanding the definition of a “standard form contract”.
• Excluding certain categories of contracts from coverage under the unfair contract term laws.

A big new stick

Presently, remedies are available against a business for its behaviour after a court has declared a contract term to be unfair. For example, ASIC may obtain redress for consumers from a financial services business which is advantaged by a term that has been declared to be unfair.[4]  In contrast, the Bill imposes civil money penalties if a business applies or relies on, or purports to apply or rely on, an unfair contract term. These penalties do not depend on a prior declaration that the relevant term is unfair. Through the substantial increase in civil penalties, the Bill seeks to provide a strong deterrent for breaches of unfair contract terms provisions in standard form contracts.  The potential maximum civil money penalty for applying or relying on, or purporting to apply or rely on, an unfair contract term under the ACL will be $2.5 million for individuals. For a body corporate, the maximum civil money penalty is the greater of:

• $50 million;
• 3 times the value of any benefit obtained directly or indirectly by that body corporate or any related body corporate that is attributable to the act or omission; or
• if the benefit cannot be ascertained, 30% of the adjusted turnover during the period of breach.

Where the ASIC Act applies (for financial services), the proposed maximum penalty for an individual applying or relying on, or purporting to apply or rely on, an unfair contract term is the greater of:

• 5,000 penalty units ($1,100,000 as of October 2022); or
• A multiple of three times the benefit derived and detriment avoided due to the contravention, as determined by a court.

For a body corporate, the proposed maximum penalty for applying or relying on, or purporting to apply or rely on, an unfair contract term in contravention of the ASIC Act is the greater of:

• 50,000 penalty units ($11,100,000 as of October 2022);
• the amount equalling a multiple of three times the benefit derived and detriment avoided due to the contravention; or
• 10% of the annual turnover of the body corporate for the 12-month period ending at the end of month in which the body corporate contravened, or began to contravene, the civil penalty provision (but if that proportion of turnover exceeds the amount equating to 2.5 million penalty units the penalty is capped at 2.5 million penalty units. 2.5 million penalty units equates to $555,000,000 as of October 2022).

The maximum penalty will not necessarily apply. A court has the obligation to consider relevant facts, such as the nature and extent of the contravention and the surrounding circumstances of the contravention, when imposing a penalty.

More small business contracts now covered – changes to upfront price, employee number and annual turnover thresholds

Presently the unfair contract term regime under the ACL applies to small business contracts where one party to the contract employs fewer than 20 persons and the upfront price under the contract is less than $300,000 (or less than $1 million if the contract is longer than 12 months).

The Bill clarifies and expands the threshold for what is considered a ‘small business’ for the purposes of the ACL. The unfair contract term protections apply if one party to the contract is a business that employs fewer than 100 persons or has an annual turnover of less than $10 million for the previous year.

Similarly, the proposed protections will apply for the purposes of the ASIC Act if the upfront price[5] payable does not exceed $5 million in addition to one of the contracting parties employing fewer than 100 persons or recording a turnover of $10 million for the previous income year.

The Bill clarifies how the 100-employee threshold applies under the ACL as well as the ASIC Act. The Bill introduces a pro rata assessment for staff employed on a part time basis as being counted as an appropriate fraction of a full-time equivalent employee. The new threshold requirements reflected in the Bill provide more certainty as to which contracts will be covered by the proposed laws.

Increased injunctive powers

Presently, upon a court declaring that a term in a standard form contract is unfair, among other things the court has the power to make an injunction restricting a party from applying, relying on or purporting to apply or rely on, the term that has been declared to be unfair.

The proposed amendments to the new unfair contract terms law provide that, in addition to the current injunctive powers, the court can grant an injunction “restraining a person from:

• entering into any future contract that contains a term that is the same or similar in effect to a term that has been declared an unfair contract term; or
• applying, or relying on, a term in any existing contract that is the same or similar in effect to a term that has been declared unfair, whether or not the contract is before the court.”[6]

Expanding the definition of a “standard form contract”

Unfair contract terms are prohibited when they are in a standard form contract.  As the law currently stands, a court will determine if a contract is a standard form contract by considering the ability and opportunity of the parties to negotiate the terms and whether one party is required to accept or reject the terms of the contract in the form they were presented.

Presently, it is not clear whether a contract is a standard form contract if a party is given the opportunity to amend minor or insubstantial terms.  Further, it is unclear whether a particular form of contract is a standard form contract if a subset of the consumer or small businesses entering into that form (but not all consumers or small businesses) are able to negotiate to vary that form.

Under the Bill, “a contract may be determined to be a standard form contract despite there being an opportunity for:

• a party to negotiate changes to contract terms that are minor or insubstantial in effect;
• a party to select a term from a range of options determined by another party; or
• a party to another contract or proposed contract to negotiate terms of the other contract or proposed contract.’’[7]

Additional exclusions from the unfair contact term regime

In addition to existing exclusions from the unfair contract term regime, a limited number of additional classes of contracts are excluded from unfair contract term protections where there are strong public policy reasons for doing so. These include:

• “the operating rules of licensed financial markets such as ASX Limited;
• the operating rules of licensed clearing and settlement facilities; and
• real time gross settlement systems approved as payment and settlement systems by the RBA.”[8]

These contracts have been excluded because there is a risk that the stability and integrity of the financial market may be compromised if the unfair contract terms provisions were to apply to these contracts.

Given these changes, it is important for businesses to revisit their compliance stance in relation to the unfair contract term laws and determine whether changes need to be made to mitigate new risks.

[1] CCA, section 131A.

[2] ASIC Act, section 12BF(1)(c).

[3] See the Explanatory Memorandum to the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022, paragraphs  2.16 to 2.20.

[4] ASIC Act, section 12GNB.

[5] When deciding if a loan contract is a “small business contract” to which the unfair contract law applies, the “upfront price” includes the principal amount of the loan and any loan establishment fees. That is, it excludes interest. See section 12BF(6) of the ASIC Act. This is different from the position when determining what the upfront price is for the purposes of considering what terms are outside the scope of unfair contract term review (e.g. section 12BI(1) of the ASIC Act). In that context, interest on a loan contract forms part of the upfront price.

[6] See the Explanatory Memorandum to the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022, p.30.

[7] Explanatory Memorandum to the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022, p.31.

[8] Explanatory Memorandum to the Treasury Laws Amendment (More Competition, Better Prices) Bill 2022, pp.31,32.

Queries

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Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.