The Impact of Unfair Contract Legislation on the Certainty of Commerce

The Australian Government’s legislative reforms on Unfair Contract Terms (UCTs) are a significant development in the business landscape. This article explores the key changes, their implications, and the necessary precautions that businesses must take to ensure compliance.

Unfair Contract Terms (UCT) Law: An Overview

Australia’s UCT regime, embedded within the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (ASIC Act), aims to prevent larger businesses from exploiting their superior bargaining power to enforce unfair terms in contracts with consumers or small businesses. The regime currently applies to ‘standard form contracts’ involving either ‘consumer contracts’ or ‘small business contracts’.

Definition of a ‘Consumer Contract’

A ‘consumer contract’ exists when one party acquires goods or services primarily for personal, domestic, or household use.

Definition of a ‘Small Business Contract’

A ‘small business contract’ is a contract in which one party is a business employing fewer than 20 persons at the time the contract is entered into and the upfront price payable under the contract does not exceed AU$300,000 or AU$1 million if the contract extends beyond 12 months.

The Current UCT Regime

Under the ACL and the ASIC Act, a term is deemed unfair if it:

  1. Causes a significant imbalance in the parties’ rights and obligations arising under the contract.
  2. Is not reasonably necessary to protect the legitimate interests of the party who would benefit from the term. There is a presumption that the term is not reasonably necessary.
  3. Would cause detriment (financial or otherwise) to a party if relied upon or applied.

The UCT regime applies only to ‘standard form contracts’. These are contracts where there is little to no opportunity to negotiate meaningful changes to the terms. However, the current regime does not provide any penalties for businesses that use UCT. If a term is found to be unfair, a court will declare it void, and the rest of the contract continues to operate, excluding the void terms.

The Proposed Changes

The proposed changes to the UCT laws are extensive and carry significant implications for businesses. These changes include:

  1. Introducing substantial financial penalties for contraventions,
  2. Expanding the number of business-to-business contracts subject to UCT laws,
  3. Providing greater flexibility for remedies for breaches,
  4. Introducing a rebuttable presumption for certain terms deemed to be unfair,
  5. Clarifying the definition of a ‘standard form contract’,
  6. Excluding clauses referring to ‘minimum standards’ provisions contained in legislation.

These reforms considerably increase the risk profile for larger businesses that engage in Business to Business (B2B) and Business to Consumer (B2C) through standard form contracts. Therefore, businesses must review the terms of affected contracts to ensure compliance.

The Impact of Proposed Changes

Each of the proposed changes carries significant implications. The introduction of financial penalties increases deterrence but may also deter businesses from entering into legitimate contracts due to uncertainty around what constitutes an ‘unfair’ clause. The expansion of the definition of ‘small business’ means more business contracts will fall under the UCT regime.

Moreover, the introduction of more flexible remedies will allow courts greater flexibility in compensating wronged parties. However, this flexibility may increase uncertainty for larger businesses regarding the breadth and magnitude of potential risks associated with losing such proceedings.

The introduction of a rebuttable presumption for similar terms will incentivise the quick removal of unfair terms without the need for repeated litigation. However, it will increase the regulatory burden on larger businesses to stay abreast of UCT cases.

Moreover, the proposed changes provide more clarity on the meaning of a ‘standard form contract’. They will assist a court in determining whether a ‘standard form contract’ has been used by providing further guidance on whether an ‘opportunity to negotiate’ has taken place.

Finally, the exclusion of ‘minimum standards’ provisions will relieve businesses from worrying about contravening the UCT regime in respect of terms relating to ‘minimum standards’ or industry-specific requirements contained in Commonwealth, state, or territory legislation.

Why Are These Changes Necessary?

The proposed changes are a response to criticisms of the current UCT regime. Critics argue that the absence of penalties does not deter businesses from using unfair terms in standard form contracts. Moreover, the regime does not cover many small businesses that would benefit from inclusion. The ambiguity in certain compliance aspects of the law and the need for more flexible remedies and means of addressing UCTs have also been cited as concerns.

The Australian Government has accepted that the absence of penalties is a deterrent problem with the current UCT regime. Hence, the proposed changes aim to address these concerns and instill certainty in the commercial environment.

What Should Businesses Do?

Businesses should review and update their standard form contracts to ensure they comply with the revised UCT provisions. The Australian Competition and Consumer Commission (ACCC) proceedings against Fuji Xerox provide guidance on the types of contract terms that the ACCC considers unfair.

Ignorance of the UCT regime could put businesses at risk of breaching other parts of the ACL, attracting substantial penalties. Misrepresenting the rights of consumers and small businesses, the inclusion of implied terms, terms hidden in fine print or written in legalese could expose businesses to contraventions of both unconscionable conduct and UCT laws.

Conclusion

The proposed changes to the UCT laws represent an important shift in the Australian business landscape. Businesses must stay abreast of these changes and adapt their contracts accordingly to ensure compliance and mitigate potential risks. By doing so, they can continue to operate with certainty in the commercial environment, providing quality services to their clients while preserving their legal and ethical obligations.

Sources

ACL https://www.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/caca2010265/
ASIC Act https://www.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/sia2001210/
Fuji Xerox case https://www.accc.gov.au/media-release/accc-takes-action-against-fuji-xerox-over-alleged-unfair-contract-terms

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