The Consumer Affairs Forum, made up of Federal Government and Consumer Affairs Ministers of various states and territories, has agreed to reform the law regarding unfair contract terms in Australia. The reform is intended to strengthen consumer protection and deter the use of unfair terms by introducing penalties for businesses that include unfair terms in their standard form contracts.

Under current laws, if there are unfair terms in a standard form contract involving a small business, and the upfront price payable under the contract is either:

  • less than $300,000; or
  • $1 million or less if the contract term is 12 months or more,

then the unfair terms will be void and unenforceable. The effect being the unfair term/s will be 'severed' from the contract and will not apply to the contract.

Unfair contract terms will now be unlawful and attract financial penalties
Under the new scheme agreed at the Consumer Affairs Forum on 6 November 2020, it will become unlawful to include unfair terms in these contracts. Courts will have the power to impose financial penalties on offending parties, though it is not clear yet what those penalties will be. Courts will also have the flexibility to vary the terms of a contract, or determine another appropriate remedy (rather than simply declaring an unfair term void, as is the current approach).

What is a small business contract?
When introduced, the new legislation will also expand the definition of 'small business contracts'. The existing legislation captures contracts for the supply of goods or services by or to a party with less than 20 employees (including regular casuals) and where the price payable is no more than $300,000 (or $1 million for a contract with a term of more than 12 months).

If enacted, the new legislation will capture parties with up to 100 employees and/or an annual turnover of less than $10 million. There will no longer be a maximum threshold for the value of the contract (that is, the new legislation will remove 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). This is a significant expansion and will bring an extensive number of new contracts within the ambit of the scheme.

What is a standard form contract?
A standard form contract is not a defined term under the current legislation. The ACCC advises that the standard form contract is one that has been prepared by one party and the other party has little or no opportunity to negotiate the terms – that is, it is offered on a 'take it or leave it' basis.

However, the new legislation will provide clarity on the weight of factors to be considered when determining if a contract is 'standard form'. These factors include whether documents have repeat usage as a template, and whether the counterparty has a genuine opportunity to negotiate terms of the contract.

It is intended that the new legislation will enable 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.

What are unfair contract terms?
There is no indication as yet that the facts and circumstances which render a provision 'unfair' will change. Generally, the types of terms that constitute 'unfair terms' include unilateral termination or variation rights, automatic extension provisions, and terms that allow one party to avoid or limit its performance of the contract or penalise one party (but not the other) for breach or termination.

What are the takeaways?
The reforms are intended to provide a fairer and more efficient allocation of risk in standard form contracts, and seek to improve consumer and small business confidence when entering into these contracts.

The reforms will also include a rebuttable presumption that if a party's contract contains a term similar to a term found to be unfair in another case, that similar term will also be presumed to be unfair unless the relevant party can show that it is not unfair in the circumstances. It will therefore be important for businesses to keep an eye out for what is happening in the marketplace and be connected to their lawyer, so that they may constantly review their contracts to ensure they do not contain terms that are considered unfair.

We do not see this as one size fits all approach; what is unfair for one party may be fair for another party depending on what is being supplied under the relevant contract and the circumstances in which the parties usually contract. As sought by the government, it will become a risk mitigation exercise where the party responsible for the standard form contract will be required to explain, and potentially provide evidence, that certain 'stricter' or 'harsher' terms are required in order to protect a legitimate interest or risk without that term being excessive or penalizing the counterparty when it is called upon.

There is still some uncertainty as to the specific details of the legislative changes, as the exposure draft has not been released. Likewise no time frame has been given for the legislation coming into force, but we do know that a consultation period will follow release of the exposure draft, with stakeholders having the ability to comment. The legislation will then be introduced some time after the end of the consultation period.