Unfair Contract Terms: Update
By William Riddle, Law Graduate, MST Lawyers
Our previous updates on the Unfair Contract Terms (UCT) provisions in the Australian Consumer Law (ACL) highlight the Australian Competition & Consumer Commission’s (ACCC) focus on the UCT laws.
The recent speech by Mr Rod Sims, chair of the ACCC, given at the Council of Small Business Organisations Australia’s National Small Business Summit, indicates there may be a further focus and crackdown in relation to the UCT laws.
The Australian Government has committed to commencing a review of the UCT provisions at the end of this year. They have asked key stakeholders, including the ACCC, for their view on the current regime.
At present, if the ACCC finds an unfair term in a standard form contract that is captured by the UCT laws, a court can deem the unfair term to be void. This means that while the business cannot enforce the unfair term(s), and is forced to remove the term(s) from its contracts in the future, no pecuniary penalties can be imposed.
It is worth pointing out that, although there are currently no pecuniary penalties for breaching the UCT laws, the effects on a business can still be significant, such as reputational damage as well as the time and expense of dealing with the ACCC and Court proceedings. Further orders can also be sought by the ACCC, as demonstrated by two recent cases:
- The waste management company JJ Richards was found to have a number of unfair terms in its small business standard form contracts. It was ordered to establish and implement a three year ‘ACL compliance program’ for every employee or person involved in the company’s business. JJ Richards was also required to publish a corrective notice on its websites and to provide a copy of the court orders to all of its small business customers affected by the unfair terms.
- Two subsidiaries of Servcorp were ordered to implement a two year ACL compliance program after their standard form contracts were found to include unfair terms. They were also required to pay $150,000 in costs to the ACCC.
In his speech, Mr Sims argued that unfair terms should be made illegal, rather than simply void. If this occurred, it would allow pecuniary penalties to be imposed on offending businesses. It will, therefore, provide a much greater incentive on businesses to remove unfair terms from their standard form contracts from the outset.
If unfair terms are made illegal, Mr Sims also noted it would allow the ACCC to use section 155 of the Competition and Consumer Act to actively investigate non-compliance, rather than simply relying on evidence provided voluntarily.
Mr Sims said that the ACCC would consider recommending the broadening of the definition of ‘standard form contract’, to capture transactions that would typically be expected to be ‘small business’ transactions but are falling outside the scope of the current UCT provisions.
Case Update: Prospa Advance Pty Ltd (Prospa) Standard Form Contract
The ACCC is not the only agency that oversees enforcement of the UCT laws. The UCT laws are replicated in the ASIC Act, which gives the Australian Securities & Investments Commission (ASIC) the jurisdiction to oversee their enforcement.
After an ASIC review, Prospa was found to have unfair terms in its standard form loan agreement for small businesses. ASIC required Prospa to make a significant number of amendments to its standard form loan agreement, including:
- Changing an early repayment clause so that the early payment of a loan is allowed without Prospa’s consent, and making discounts for early payment mandatory instead of at Prospa’s discretion;
- Significantly narrowing the circumstances in which Prospa could rely on a ‘unilateral variation’ clause to vary the agreement without the consent of the borrower;
- Amending the ‘events of default’ clause to ensure that borrowers can remedy certain defaults, and permit changes of control to the borrower with Prospa’s consent (which cannot be unreasonably withheld);
- The removal of an ‘entire agreement’ clause, so that Prospa would not be absolved of responsibility for representations it made to borrowers that were not recorded in the written loan agreements;
- Narrowing the borrower’s indemnity, so that it does not cover third parties, or losses that are caused by the fraudulent, negligent or wilful misconduct by Prospa; and
- Changing some provisions relating to guarantors, such as:
- Only allowing certain parties connected to the borrower to be a guarantor to a loan agreement and;
- limiting the guarantor’s liability so that the guarantor is not liable for any increase in the amount of the loan principal and interest agreed at the start of the loan.
ASIC has announced that it will continue to review the standard form loan agreements used by lenders to ensure that they comply with the UCT laws of the ASIC Act.
These recent developments relating to UCT laws show that both the ACCC and ASIC are cracking down on the use of unfair terms in small business contracts.
It is a timely reminder of the necessity to seek help from a legal professional to review any contracts you think may contravene the UCT laws. We can also help you if you think that a contract you have entered into may contain unfair terms.