Most businesses would have heard about the unfair contract terms component of the Australian Consumer Law. However, at this time, the only real consequence to a business having unfair terms in its standard documentation is that the term may be deemed unenforceable by a court. This creates no real incentive for businesses, particularly big businesses, to be proactive and adopt fair practices.
The Federal Government is about to take some significant steps to change this position as outlined in this article.
A quick review of ‘Unfair Contract Terms’
Before proceeding further, it is important to remind ourselves of what unfair contract terms law is all about.
The unfair contract terms regime applies to standard form contracts, being contracts that customers are generally expected to sign on a ‘take it or leave it’ basis.
An unfair contract term is a term in a standard form contract that meets all 3 of the following criteria:
- the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- the term is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- the term would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.
Examples of terms that have been considered unfair contract terms include:
- excessively broadly terms that could be abused, such as a term which allows for termination of the contract for any breach, however minor;
- excessive liability limitations, such as a term denying all liability even in case of negligence or wilful misconduct; and
- a term allowing a business to unilaterally change a fundamental aspect of the contract, in circumstances where had the customer known, they wouldn’t have entered into the contract.
It is important to note that the unfair contract terms regime does not apply to terms addressing the main subject matter of a contract, such as the description of goods or services being supplied, or the price. Unfair terms also do not extend to terms which are required or specifically permitted by law.
Currently the unfair contract terms regime:
- only applies in relation to customers who are consumers or small businesses (being businesses that employ less than 20 people and where the contract is for a price of less than $300,000 upfront or $1m over 12 months);
- does not apply to certain contracts such as maritime shipping contracts and constitutions of companies and managed investment schemes; and
- results only in a term being declared unenforceable by a court of law, if determined so in proceedings brought by the customer or the ACCC.
Some of these matters are about to change considerably.
Extension of the Unfair Contract Terms regime to Insurance Contracts
The Insurance Contracts Act 1984 (Cth) was recently amended such that the unfair contracts term regime now extends to all types of general insurance contracts, including car insurance, travel insurance, health insurance, life insurance, and house and contents policies. The only insurance contract that continues to be excluded is medical indemnity cover.
There is some specific guidance in relation to insurance contracts:
- The unfair contract terms regime only applies to insurance contracts entered into from 5 April 2021.
- Terms dealing with the amount of excess or deductible will not be unfair if (1) ‘transparent’; and (2) disclosed at or before the contract is entered into. ‘Transparent’ means, among other qualities, written in reasonably plain language.
- The excluded main subject matter of the contract extends only to ‘what is being insured’, being the identity of the person or item insured. The insured risks and exclusions form part of the general terms of contract that are subject to the unfair contract terms regime.
- Challenge of a term in an insurance contract under the unfair contracts term regime may also be brought by a third party beneficiary of the policy, in addition to the customer.
- The unfair contract terms regime does not affect or limit the ‘duty of utmost good faith’ in Part II of the Insurance Contracts Act 1984 (Cth) which continues to apply independently.
Future changes extending definition of small business and introducing penalties
In November 2020, the Federal and State Ministers for fair trading and consumer protection came together and agreed to some future amendments to the unfair contract terms regime. These are yet to be presented as legislation in Federal Parliament, so it is difficult to know when they will take effect, but it is important to note them, as they are the next progression of this body of law which businesses need to be prepared for.
Under the proposed changes:
- The definition of small business will be extended to businesses with less than 100 employees or an annual turnover of not more than $10million, and without limit on the price of the contract.
- The use of unfair contract terms will be considered unlawful, not simply unenforceable. This means that civil penalties will apply. There has been no announcement on the type of penalties, but the current maximum penalty for the contravention of the Australian Consumer Law is the greater of (a) $10m per contravention; or (b) 3 times the value of the benefit from the contravention or, if the benefit cannot be determined, 10% of Australian turnover of the offender in the 12 months prior to the contravention.
- Courts will be able to order a range of remedies, including damages, not only deem a term unenforceable.
- There will be a rebuttable presumption that a term is unfair if the same or substantially similar term was determined unfair by a court previously against the same offender or in the same industry sector.
- Although a rebuttable presumption already exists that a contract is a standard terms contract, there will be greater guidance on what constitutes a standard form contract. This will include whether there has been repeat usage of the contract and whether a customer was given ‘an effective opportunity to negotiate the terms of the contract’.
- Terms that address ‘minimum standards’ will be exempted, as well as certain other industry specific requirements contained in Federal or State legislation.
What action should you take?
This time is as good as any to have your business documentation reviewed by your solicitor and brought up to date with all changes in law over the last few years, as well as to address possible unfair contract terms that might exist, in preparation for these future changes in law.
Bennett & Philp provides a complimentary legal health check for all clients looking to engage us for legal support. Contact us now to arrange your legal health check and see if you need to update your contract documentation and procedures.
This article was written by Nadia Sabaini, director in business law and finance at Bennett & Philp Lawyers and finalist in the Lawyers Weekly Partner of the Year Awards (Banking and Finance) and the Women in Finance Awards (Banking and Finance Lawyer of the Year) for 2020 and 2021. You can book your free consultation session with Nadia directly via LawTap or contact her today on +61 7 3001 2913.
Individual liability limited by a scheme approved under professional standards legislation (personal injury work exempted).