Review of Unfair Contract Terms and Upcoming Reform

By Alicia Hill, Principal and Sian Harding, Law Clerk

The unfair contract terms (UCT) regime can be found in the Competition and Consumer Act 2010 (CCA) and was originally brought in to protect consumers in circumstances where there is a large imbalance of power regarding the formulation of contracts. Since 2016 this protection has been extended to small businesses. The regime was slated for further expansion by the Federal Government’s Decision Regulation Impact Statement published on 9 November 2020 following substantial advocacy from the ACCC. It is not yet clear when these changes will be formalised, however the changes and potential impacts will be discussed in this article.

Overview of key provisions

The key operative provision is section 23 CCA which outlines that a term of a consumer or small business contract will be void if it is unfair, and if the contract is a standard form contract. The specification that the contract must be a standard form contract arises due to the aim of the provision being to protect consumers and small business from the power imbalance that arises in the agreement of such contracts due to the imbalance of bargaining power and information asymmetry. Section 23 relies upon subsequent provisions, sections 24 and 27, to further explain the meaning of ‘unfair’ and ‘standard form contract’.

Standard form contracts

Section 27 outlines that a contract is presumed to be a standard form contract unless it is proven otherwise, and consequently places the burden of proof upon the potential defendant.

In determining whether the contract is actually a standard form contract, the court considers:

• The bargaining power of the parties;
• The timing of when the contract was prepared in relation to the transaction;
• Whether the contract amounts to a ‘take it or leave it’ offer without room for negotiation on terms; and
• Whether the contract takes into account the specific characteristics of the other party and/or the particular transaction.

These considerations are not conclusive, nor do they encompass all the factors that the court is allowed to consider, as outlined by Edelman J in ACCC v Chrisco Hampers Australia Limited [2015] FCA 1204.

The meaning of ‘unfair’

In order to demonstrate that a standard form contract term is unfair, it must be shown that:

• It would cause significant imbalance in the parties’ rights and obligations under the contract;
• It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
• It would cause detriment to a party if applied or relied on.

When assessing whether the term is unfair in line with the above criteria, the court must take into account the extent to which the term is transparent, and also the contract as a whole.

Additionally, the legislation outlines in section 25 a number of examples of unfair terms. However, it is not universal criteria against which every situation can be applied, terms may have the same effect as those outlined in section 25 yet not be unfair in certain circumstances. This was emphasised by Edelman J in ACCC v Chrisco Hampers Australia Limited [2015] FCA 1204.

Substantial case law has arisen in response to the ambiguity and scope of the definition of an unfair term, however courts have been reluctant to definitely outline criteria to be applied to all circumstances.

It must also be noted that when determining whether a provision is ‘unfair’ the court acknowledges that the UCT legislation operates in the context of an underlying policy that true freedom of contract must also be respected.

Finally, it is only those terms that do not form the main subject matter of the contract, for example the upfront price payable, that may be consider unfair. Terms that define the main subject matter of the contract are exempted from the regime by section 26.

Reform of the regime

Following strong advocacy from the ACCC, businesses and practitioners regarding the current narrow reach and ambiguity of the UTC regime, the regime is likely to undergo significant reform. The reform is proposed to be in the following key areas.

Penalties

Currently, if a term is found to be unfair, it is automatically voided. However, it has been recognised that voiding a term has not provided an effective deterrent, and the voiding of a term may make a contract unworkable in certain circumstances. The proposed reforms intend to make UCT’s unlawful and give the Court the power to impose civil penalties

Remedies

As the legislation presently stands, where there is a term that is voided because it is found to be unfair, a small business or regulator may seek an injunction, orders for compensation and other orders that the court thinks are appropriate.

This may occur if it is found that they have suffered loss or damage as a result of the application or reliance on the unfair term. However, these remedies have been found to be inaccessible for many small businesses, and are currently irregularly applied, leading to uncertainty.

The reform proposes to give the court the power to determine an appropriate remedy in the UCT proceeding, rather than being bound to declare the term automatically void. It also proposes to extend the scope of persons able to access the remedies. Remedies will be available to those party to the proceeding and also ‘non-party consumers’ and ‘non-party small businesses’

Definition of a small business contract

Another aspect of the proposed reform is to increase the scope of the UTC regime in the context of small businesses.

Currently there is a requirement that the upfront price of the contract must be below $300,000 if the contract is for less than 12 months, or $1 million where the contract is for 12 months or more. This has previously excluded small businesses that operate on a model with long term high value contracts that generate low profit margins. It has been signalled that as part of the reform proposed this aspect of the regime will be dispensed.

Additionally, the threshold number of employees a party could have and still be considered to have entered into a small business contract was 20. This is proposed to be increased to 100 employees, or an annual turnover of less than $10 million.

Definition of standard form contract

There has been recognition that the current definition of a ‘standard form contract’ is somewhat ambiguous.

In response to this, the proposed reforms will include further clarity about what is a ‘standard form contract’. This is proposed to occur through requiring that the court consider whether there is repeat usage of a contract when determining whether it is a standard form contract, and further clarify what actions do not constitute ‘an effective opportunity to negotiate’ which is an existing indicator in the legislation as to whether a contract is a standard form contract.

Presumption of unfairness

Another aspect of the proposed reform is the potential introduction of a rebuttable presumption that a contract term is unfair if, in a separate case, the same or substantially similar term has been used by the same entity or in the same industry, and has been declared by a court to be unfair. This has been proposed to address the resource imbalance between parties, as the contract issuing party is often better resourced than small businesses or consumers. Additionally, it is assumed that the relevant evidence as to whether a term is not unfair in the circumstances often lies within the knowledge of the contract issuer.

However, the Decision Regulation Impact Statement highlights that this will be an aspect of the proposed reform that still needs to be further developed, in particular with regards to how the presumption will be applied.

Minimum standards to be exempt from the regime

Currently the regime exempts provisions that are mandated by law. However, there are some laws that require that, if certain clauses are included in a contract, terms setting industry specific requirements must also be included in the contract.

Whilst the terms are exempt from the regime, the headline clause is not as it is not mandated by the law, which has led to illogical outcomes. The new approach would be to allow certain headline clauses that, while not necessarily ‘required’ or ‘expressly permitted’ by legislation, to the extent that they allow the legally mandated terms to be incorporated into the contract.

Impact of these reforms

These proposed reforms widen the scope of the UCT regime.

Businesses that may not have been considered to operate small business contracts in the past may now be subject to the regime. Additionally, including a rebuttable presumption regarding terms similar to those that have been determined as unfair contract terms increases the ongoing onus on contract issuers to ensure that their contracts do not contain unfair contract terms compared to their peers.

Finally, the introduction of civil penalties in addition to the potential voidance of the contract terms is proposed to ensure compliance with the legislation. As such, contract issuers should conduct a review of their standard form contracts used when dealing with consumers or small businesses to ensure that the terms will not be subject to voidance by the courts and that issuers will not be subject to any of the other introduced penalties.

For  more information and examples of terms that have been found to be unfair contract terms please click on the following links to see past articles we have published on this area: ‘Dealing with Unfair Contract Terms’ and ‘Unfair Contract Terms: Update’

If you have any queries about unfair contract terms, or how the upcoming reform may affect you, please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au