Changes strengthening and expanding the unfair contract terms regime to undergo consultation

25 November 2020

The Federal and State governments have recently announced greater protections for small businesses under the unfair contract terms regime that will have the effect of giving long awaited protection to vehicle automotive dealers (Dealers). These changes have been highly anticipated since late 2018 when the consumer unfair contract terms regime set out in the Australian Consumer Law (ACL) (and in the Australian Securities and Investments Commission Act 2001 (ASIC Act) with respect to contracts for financial products and services) was extended to cover ‘standard form’, ‘small business contracts’ entered into, renewed or varied on or after 12 November 2016.

Consultation with various stakeholders throughout 2019 and 2020 have sighted deficiencies in the regime, which left many Dealers subject to unfair and rigid standard form Dealer Agreement contracts despite the existing laws. As a result, the Federal government will now look to draft legislation that makes unfair contract terms unlawful, imposes civil penalties and expands the range of businesses to which the unfair contract terms regime will apply.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell said ‘the new small business thresholds would ensure 99 per cent of businesses were covered by the tougher unfair contract rules1‘.

What is the Law now?

The Australian Consumer Law provides some protections to small businesses from unfair terms in standard form contracts. Under the current legislation2, the unfair contract regime applies to standard form contracts entered into or renewed on or after 12 November 2016, where:

  1. The contract is for the supply of goods or services or the sale or grant of an interest in land;
  2. At least one of the parties is a small business (employs fewer than 20 people, including casual employees employed on a regular and systematic basis); and
  3. The upfront price payable under the contract is no more than $300 000 or $1 million if the contract is for more than 12 months.

If a contract is varied on or after 12 November 2016, the law applies to the varied terms.

Most Dealers do not meet the threshold requirements of the existing unfair contract regime.

Also, 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 small business contracts to be unfair and therefore unenforceable. In addition, a party to an eligible standard form contract, the ACCC or ASIC have standing to seek a declaration that a term is unfair.

What are the proposed changes?

Following a meeting of the Ministers of Consumer Affairs last week, Federal government has proposed to make the following changes:

  1. Unfair contract terms are to be unlawful and courts are to be given the power to impose civil penalties;
  2. More flexible remedies will be made available to courts when declaring a contract term unfair such as:
    1. Giving courts the power to determine an appropriate remedy, rather than the term being automatically void;
    2. Clarifying that the remedies available for ‘non-party consumers’ also apply to ‘non-party small businesses’; and
    3. Creating a rebuttable presumption provision for unfair contract terms;
  3. Increase the eligibility threshold for the protections from ‘less than 20 employees’ to ‘less than 100 employees’;
  4. Introduce an annual turnover threshold of less than $10 million as an alternative threshold to employee head count for determining eligibility;
  5. Remove the requirement for the upfront price payable under a contract to be below a certain threshold in order for the contract to be covered by the unfair contract term protections;
  6. Improve clarity around the definition of ‘standard-form contract’ by providing further certainty on factors such as repeat usage of a contract template, and whether the small business had an effective opportunity to negotiate the contract; and
  7. Enable certain clauses that include ‘minimum standards’ or other industry-specific requirements contained in relevant Commonwealth, state or territory legislation to be exempt from the protections.3

How does this affect Dealers and what should you do in light of this announcement?

Once the new law is enacted, it will be more important than ever for Dealers and Dealer Councils to carefully review any proposed changes to Dealer Agreements and the enforcement of rights by Vehicle Distributors under their Dealer Agreements, including setting and enforcing uncommercial performance targets, to ensure that they do not constitute unfair terms or the enforcement of an unfair term. Vehicle Distributors may have previously had a greater risk appetite and included terms in their standard franchise agreements because they believed the likelihood of regulatory action was low. Under the anticipated changes to the regime, this will no longer be the case. The proposed laws will provide courts with greater flexibility to impose stronger penalties. In addition Vehicle Distributors that previously thought Dealers too large to fall within the unfair contract term regime should now reconsider their risk profile and review their standard form Dealer Agreements.

This article was written by Evan Stents, Partner, Teresa Torcasio, Partner, Caitlyn White, Senior Associate and Chantelle Radwan, Solicitor.

2 Section 23(4). Schedule 2 to the Competition and Consumer Act 2010 (Cth)
3 Joint Communiqués – Meeting of Ministers for Consumer Affairs Friday 6 November 2020

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