Reform to the UCT framework is on the horizon and Treasury recommends that UCTs attract civil pecuniary penalties unfair contract terms penalties
On 9 November 2020, Treasury released its Regulation Impact Statement for Decision titled ‘Enhancements to Unfair Contract Term Protections’ (Impact Statement). The Impact Statement was released following the Commonwealth and state and territory consumer affairs ministers agreeing to strengthen the existing unfair contract term (UCT) protections in the Australian Consumer Law. Our Insurance Team has published a KWM Insight article which considers key elements of the proposed reforms and recent ASIC guidance, which can be found here. i
What’s the problem and what’s changing?
Treasury identified several concerns with the existing UCT framework following a lengthy consultation process with stakeholders. One of the main concerns raised in the Impact Statement is that the current UCT framework does not prohibit the use of UCTs, but rather only allows a court to declare that a term is unfair and therefore void. It is noted that this would allow the contract-issuing party to intentionally include and rely on terms in their standard form contracts that may be unfair, with the risks limited only to being unable to rely on the term if a court or tribunal declares the term is unfair[1] and therefore void. As a result, the current UCT framework may not provide adequate protection for consumers from UCTs.
One of the key reforms proposed by the Impact Statement, that seeks to answer the concern outlined above, is that UCTs should be made unlawful and, where the action is brought by a regulator (likely the ACCC or ASIC), the court should be granted the power to apply a civil pecuniary penalty for the contravention. The proposed civil pecuniary penalty would be in addition to the court declaring the UCT void.
The Impact Statement recommends that the court determine the appropriate penalty amount in the circumstances of the case, up to the maximum set under the law (currently the higher of $10 million, three times the value of the benefit received, or 10% of annual turnover in preceding 12 months, if the court cannot determine the benefit obtained). The Impact Statement suggests that this reform would act as a deterrent for parties against including UCTs in their standard form contracts.
Other key reforms recommended in the Impact Statement include:
- increasing eligibility for the protections by expanding the definition of small business and removing the requirement for a contract to be below a certain monetary threshold; and
- improving clarity on when the protections apply, including on what is a ‘standard form contract’.
The primary objective of the reforms proposed in the Impact Statement is to enhance the effectiveness of the current laws designed to protect small business and consumers from UCTs. The reforms aim to reduce the prevalence of unfair terms in small business and consumer standard form contracts, promote a more efficient allocation of risk, and improve small business and consumer confidence when entering in to standard form contracts.[2]
Next steps: what do you need to do?
Treasury has advised that it will develop exposure draft legislation and that there will be a further opportunity for stakeholders to provide submissions on the draft legislation. In the meantime, businesses should consider undertaking a review of their standard form contracts to ensure that they do not contain UCTs in advance of UCTs becoming unlawful. We will continue to monitor the UCT framework reform process, so keep an eye out for further updates. unfair contract terms penalties
[1] Impact Statement, 23
[2] Impact Statement, 33
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