Reforms and penalties: Unfair Contract Terms and Construction Contracts

On 23 August 2021, the Treasury drafted a bill to amend the unfair contract terms provisions under the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Australian Consumer Law (ACL).  The proposed bill is called the Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Unfair Contract Terms Reforms (Bill).

Part A – Key provisions

Who does it apply to?

Current provisions under the ACL and ASIC Act

Unfair contract term protections apply to a small business contract if one party to the contract is a business that:

  • employs fewer than 20 employees; and
  • the upfront price payable under the contract does not exceed one of the two alternative monetary thresholds provided for in the law being:
    • the upfront price payable under the contract does not exceed $300,000; or
    • if the contract has a duration of more than 12 months, the upfront price payable under the contract does not exceed $1 million.

Proposed Changes

Unfair contract term protections will apply to a small business contract if one party to the contract is a business that:
  • employs fewer than 100 employees; or
  • has a turnover for the last income year of less than $10,000,000.

No monetary thresholds.

The effect of the change will be to extend the application of the unfair contract term protections to many more construction contracts.

Unfair contract terms under the ACL

Current provisions under the ACL and ASIC Act

A contract term will only be unfair if three tests are satisfied (ACL s 24(1)):

  1. the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  2. the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  3. the term would cause financial or other detriment to a consumer if it were relied on.

Examples of unfair contract terms are as follows (ACL s 25):

  • a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract;
  • a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract;
  • a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract;
  • a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract;
  • a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract;
  • a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
  • a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
  • a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent;
  • a term that limits, or has the effect of limiting, one party’s right to sue another party;
  • a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract;
  • a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract;
  • a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.

Proposed Changes

The new Bill does not amend the definition of unfair contract terms.

As example, in Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 the Federal Court of Australia declared that the following terms were unfair:

  • “Indemnity. To the maximum extent permitted by law, the customer shall be responsible for and indemnify JJR from and in respect of all liabilities, claims, damages, actions, costs and expenses which may be incurred by JJR on a full indemnity basis (whether successful or not) as a result of or arising out of or otherwise in connection with this agreement, including any breach by the customer of any of the warranties, covenants and conditions herein.”
  • “No termination without final payment. Payment in full of all monies outstanding must be made before this agreement can be terminated. The equipment will not be removed until such payment is made and rental for the equipment may be charged if delays in payment of the final account occur.”

There are often similar provisions in construction contracts.

Part B – Miscellaneous

Pecuniary penalty

Current provisions under the ACL and ASIC Act

No equivalent.

Proposed Changes

A pecuniary penalty may be imposed if a person proposes, applies, relies or purports to apply or rely on an unfair contract term. If passed, courts will be able to impose a civil penalty of up to:

  • $500,000 for individuals; or
  • for corporations the greater of:
    • $10 million; or
    • three times the value of the benefit derived from the contravention; or
    • 10% of annual turnover.

Rebuttable presumption

Current provisions under the ACL and ASIC Act

No equivalent.

Proposed Changes

To assist the efficiency of the regulator, where a term has, in previous court proceedings, been found to be unfair, the same or a similar term will be presumed to be unfair in any subsequent proceedings. This applies not only where the term is proposed by the same contracting party, but also where the term is proposed by a person in the same industry.

Definition of Standard Form Contracts

Current provisions under the ACL and ASIC Act

In determining whether a contract is a standard form contract, a court must take into account a number of matters, including

  • whether one party was required to reject or accept the terms of a contract in the form in which they were presented; and
  • whether another party was given an effective opportunity to negotiate the terms of the contract.

Proposed Changes

In addition to the current matters that must be taken into account when determining whether a contract is a standard form contract, a court must also take into account whether one of the parties has used the same or similar contract before.

When determining whether one party was required to reject or accept the terms of a contract in the form in which they were presented, and whether another party was given an effective opportunity to negotiate the terms of the contract, the court must not consider:

  • whether a party had an opportunity to negotiate minor or insubstantial changes to terms of the contract;
  • whether a party had an opportunity to select a term from a range of options determined by another party; or the extent to which a party to another contract or proposed contract was given an effective opportunity to negotiate terms of the other contract or proposed contract.

Broader court powers

Current provisions under the ACL and ASIC Act

A court may make an order to void, void ab nitio (void the contract from the beginning), vary or refuse to enforce a part or all of the relevant contract.

Proposed Changes

The Bill retains the automatic voiding provisions present in the existing law. In addition, courts will be afforded additional powers to respond to breaches of the unfair contract term laws. This includes the power to:

  • make injunction orders to restrain contracting parties from including, applying or relying on a term that is the same or similar to a term that has been declared unfair in that party’s other contracts;
  • issue public warning notices; and
  • make orders to disqualify a person from managing a corporation in response to a breach.

Exempt Terms

Current provisions under the ACL and ASIC Act

Contractual provisions that are required, or expressly permitted by a law of the Commonwealth, or of a State or Territory, are exempt from the unfair contract term regime.

Proposed Changes

Contractual provisions that are taken to be included in a contract by operation of a law are also excluded.