Are the proposed further protections against unfair contract terms fair?

The Commonwealth Government is now moving to strengthen protections for consumers and small businesses against unfair contract terms (UCTs).  Public consultation on draft legislation amending the ACL and the ASIC Act closed on 20 September 2021. What is expected, when, and is it fair?

Legislation should be introduced to Parliament shortly and have a 6-month transition period after passage. The final form of the new regime is likely to mirror closely the reforms agreed between Commonwealth, State and Territory Consumer Affairs Ministers in November 2020, in particular to:

  • make UCTs unlawful and give courts power to impose civil pecuniary penalties;
  • create a rebuttable presumption that certain terms to similar effect are UCTs;
  • award remedies if loss “may: be caused by a UCT;
  • expand the protections from entities with less than 20 employees to those with less than 100 employees and introduce an alternative annual turnover threshold of less than $10 million.

First on penalties, the ACCC remains concerned about the ongoing use of unfair terms in certain industries, but it has successfully dealt with those issues. The problem with automatic unlawfulness and exposure to a penalty is the lack of clarity as to what is or isn’t unfair; a term which may be unfair in one circumstance will not necessarily be unfair in another circumstance between different contracting parties.  The legislation has always previously recognised this; for example, it has never provided for financial penalties to be imposed generally for mere misleading conduct, only for false or misleading representations in relation to specific objectively measurable matters.

The maximum penalty available for each UCT contravention will, as now proposed, be for:

  • businesses, the greater of A$10 million, three times the value of any benefit from the contravention and 10 per cent of Australian 12-month turnover prior to the contravention; and
  • individuals, $500,000.

The legislation does not distinguish between terms that may be “unfair” and terms which, because they are reasonably necessary to protect the legitimate interests of the party issuing a contract, would not be considered “unfair”. It also creates a risk of penalties that are disproportionate to the conduct where UCTs result in many individual contraventions. The proposed regime does not have regard to the particular circumstances of each case, contrary to the existing UCT regime. Once the term is unfair, each contract entered into and instance of the term being applied or relied on is subject to penalties, without regard to the factual circumstances of each contract or each instance. Many advocated a warning system as a necessary precursor to the blunt stick penal approach, but it appears unlikely that will be adopted.

Second, the proposed legislation provides for a very broad presumption (albeit rebuttable) that a term is unfair. Once it is established that a term is unfair in one proceeding, there is a presumption that it is unfair in another proceeding:

  • between other parties (in other circumstances);
  • where the term is substantially similar in effect; and
  • the term is proposed by the same person or entered into in the same industry.

That extension seems unduly broad and unfair, particularly in its potential application to penal proceedings where the crown or regulator is traditionally expected to prove its case. It is also quite contrary to the existing UCT regime, where a finding of unfairness necessarily turns on an evaluative assessment of the particular facts and context of the relevant contract, parties and term. For example, one party’s “legitimate interests” will commonly be different to another’s, particularly in different industries.

The presumption also gives rise to a risk of class actions in relation to particular contract terms, when they may well not be efficient vehicles for the determination of multiple claims because of the variable facts and circumstances that bear on whether a particular term is unfair from case to case.

Third, the proposed amendments lower the threshold for obtaining remedies from that “loss or damage has occurred or is likely to occur”. Under the current Bill, a person will only need to show that the orders will prevent loss and damage that may be caused. “Likely” is a well understood term used throughout the ACL. It appears regulatory overreach and productive of uncertainty to impose remedies where there is only a speculative possibility that loss or damage may be caused.

Finally, the expanded definition of “small business contract” which extends the reach of the broader protections should be noted. It may well lead to an unintended consequence of benefiting large corporate groups routinely structured so that the contracting entity may well not itself have large numbers of employees or revenue.

The content of this article is intended to provide a general guide to the subject matter. Specific advice should be sought about your specific circumstances.

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