By joint media release on 28 March 2019, the Hon Stuart Robert, MP and the Hon Michaelia Cash, Senator announced that the Morrison Government will seek to strengthen protections to small businesses from unfair contract terms (Media Release).
The Labor party have also previously announced their intention to make unfair contract terms illegal, introduce penalties of up to $10 million for contracts containing unfair contract terms and increase the number of small businesses eligible for protection under the regime1. This client alert gives a brief overview of the unfair contract terms regime, the review of the business to business unfair contract terms regime undertaken in late 2018 and the potential changes to the regime to be assessed pursuant to the regulation impact process.
The unfair contract terms regime
The consumer unfair contract terms regime is set out in the Australian Consumer Law2 (ACL) (and in the Australian Securities and Investments Commission Act 2001 (ASIC Act) with respect to contracts for financial products and services) and has been in effect since 1 July 2010.
The regime was extended to cover “standard form”, “small business contracts” entered into, renewed or varied on or after 12 November 2016 (B2B UCT regime) where:
- The contract is for a supply of goods or services, or a sale or grant of an interest in land;
- At the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
- Either of the following applies:
- the upfront price payable under the contract does not exceed $300,000; or
- he contract has a term of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
It is currently not unlawful to include unfair contract terms in a standard form contract, however a Court or relevant Tribunal can declare terms in standard form consumer contracts or small business contracts to be unfair and therefore unenforceable. A party to an eligible contract, the ACCC or ASIC has standing to seek a declaration that a term is unfair.
Review of the unfair contract terms regime
During the passage of the Act introducing the B2B UCT regime in late 2015, the Government agreed to undertake a review of the B2B UCT regime two years after its commencement. The review opened on 21 November 2018 and closed on 21 December 2018 (the review). There are 47 published responses to the review, noting that responses are only published where permission is given by the respondent.
The ACCC’s position
On 31 August 2018, ACCC Chair Rod Sims stated in his address to the COSBOA National Small Business Summit, amongst other things:
“The Australian Consumer Law currently allows a potentially unfair contract term to be challenged in a court so it can be declared void, but it does not prohibit such a term being included in a contract in the first place.
Companies can include potential unfair contract terms in their contracts and when, and only when, challenged by the ACCC, can companies remove them from their standard contracts. There is little the ACCC can do to hold them to account for prior conduct. Neither can the ACCC issue infringement notices for unfair contract terms.
The regime has two significant flaws: first, unfair contract terms are not illegal, and second the ACCC cannot seek penalties when the court has declared an unfair contract term void, nor can we issue infringement notices for contract terms that are likely to be unfair.”
These sentiments were reaffirmed by ACCC Deputy Chair Mick Keogh at the National Franchise Convention Legal Symposium on 14 October 2018.
It is therefore not surprising that the ACCC’s principal recommendation in its response to the review, dated 21 December 2018, is that inclusion of an unfair contract term in a standard form contract should be a contravention of the ACL and subject to civil pecuniary penalties and other remedial orders available to the court for contraventions of the ACL.
Proposed changes to the B2B unfair contract terms regime arising from the review
The Media Release states that the Government will consult on the following options to amend the unfair contract terms regime:
- Making unfair contract terms illegal and attaching civil penalties to breaches;
- Redefining small business for the purposes of the protections as a business that employs fewer than 100 persons at the time the contract was entered into or had an annual turnover less than $10 million;
- Broadening the coverage of small business contracts by removing the value threshold;
- Further clarifying the definition for a standard form contract;
- Extending the unfair contract terms protections to government contracts;
- Considering exempting ‘minimum standards’ (such as standards about payment terms or leasing legislation) prescribed by state and territory laws from the regime to prevent regulatory overlap; and
- Considering whether it is appropriate to apply any changes to the B2B UCT regime to the consumer regime and to insurance contracts (noting that the Government has committed to extending the unfair contract terms regime to insurance contracts).
The proposal to extend the unfair contract terms protections to government contracts was raised in Independent Contractors of Australia Incorporated’s response to the review. The unfair contract terms regime currently applies to contracts with a Commonwealth, state or territory body to the extent that it is carrying on a business. In contrast, a government body that engages in procurement activities, but is not carrying on a business, is not subject to the unfair contract terms regime3.
As at the date of this client alert, the consultation process has not commenced.
Recommended changes to the B2B unfair contract terms arising from the “Fairness in Franchising” report
In addition to the proposed changes arising from the review, changes to the unfair contract terms regime were either recommended, or recommended for further consideration, in the Parliamentary Joint Committee on Corporations and Financial Services “Fairness in Franchising” Report released on 14 March 2019 (Report).
With respect to the unfair contract terms regime, the Report recommends that a Franchising Taskforce considers (in addition to other recommendations raised in the Report):
- The appropriateness of making unfair contract terms illegal and attaching civil penalties to breaches;
- Amendments to the Franchising Code of Conduct to require compliance with the unfair contract terms regime;
- How to amend the unfair contract terms regime so that it applies to all franchise agreements irrespective of any other term in the franchise agreement or other agreements;
- Options to address unfair contract terms in perpetual franchise agreements which may never become subject to the B2B unfair contract terms regime as they were entered into prior to 12 November 2016; and
- Whether the Franchising Code of Conduct should place restrictions on unilateral variation to subsidiary requirements to franchise agreements, such as franchise manuals or policies.
The Report also recommends:
- That the Government amend the Franchising Code of Conduct to provide that unilateral variation to franchise agreements can only be made with the agreement of the majority of franchisees (or their representatives) within the same franchise system;
- That the Government resources the ACCC to enable it to appropriately investigate all complaints or whistle-blower reports about unfair contract terms; and
- Amending the Competition and Consumer Act 2010 (Cth) to enable the ACCC to use its information-gathering powers under section 155 to obtain evidence about whether a standard form contract contains an unfair contract term. The ACCC and ASIC were given such powers in October 2018 and therefore it remains to be seen whether there will be any further changes to the ACCC’s information gathering powers under section 155.
The next step is for the Government to respond in detail to the Report, outlining which recommendations they intend to adopt and those that they will not act on.
What this means for businesses using standard form contracts
It is more important than ever for businesses to review their standard form contracts and remove or amend potentially unfair terms. Businesses may have previously elected to retain potentially unfair terms in their standard form contracts, because they believed that the likelihood of regulatory action or a counterparty seeking to challenge the term in Court, was low. However, the risk associated with this approach continues to increase. Businesses that may have considered themselves too large to fall within the ambit of the regime may also need to rethink their position, particularly if the “small business contract” test is broadened to encompass businesses employing “fewer than 100 persons” rather than the current threshold of “fewer than 20 persons”.
This article was written by Teresa Torcasio, Partner and Marian Ngo, Senior Associate.
2Schedule 2 of the Competition and Consumer Act 2010 (Cth)