When running a business, it is your duty to have knowledge of your rights and enforce them. Currently, unfair contract terms (UCTs) are not unlawful and can only be void when they are found. These terms are sometimes hidden within contracts and you may not even realise that they are unfair.
When courts find a term to be unfair, it is automatically void. Although the court can make the advantaged party (from using the UCT) compensate the disadvantaged party, there are no other penalties.
This is about to change from 5 April 2021 with UCT laws extended to include insurance contracts, and also the introduction of significant penalties for the usage of unfair terms.
However, before we get into the changes, let’s break down what UCT laws are.
What Is An Unfair Contract Term?
It can be overwhelming to navigate the Australian Consumer Law (ACL). You can find the provisions relating to UCTs under the ACL in Schedule 2 of Part 2-3 of the Competition and Consumer Act 2010.
The ACL and Australian Securities and Investments Commission Act 2001 (ASIC Act) declares a term is unfair if:
- It would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
- Would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Commonly occuring UCTs will usually allow one party to have more control over the contract than the other party, for example in:
- Terminating the contract
- Varying or introducing new terms to the contract
- Avoiding their duties under the contract
Currently, the application of UCT laws can only be found in consumer contracts and small business contracts as long as they are also standard form contracts.
What Is A Standard Form Contract?
Although a standard form contract is not explicitly defined in the ACL, it is a contract where the other party does not have room to negotiate, a ‘take it or leave it’ situation.
Factors taken into consideration in determining whether a contract is a standard form contract include:
- Did one of the parties have all or most of the bargaining power in the transaction?
- Was the contract prepared by one party before any discussion with the other party?
- Did one party have to either accept or reject the contract in the form in which it was presented?
What Is A Consumer Contract?
Under section 23(3) of the ACL, a consumer contract is defined as a contract for:
- a supply of goods or services;
- or a sale or grant of an interest in land
to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.
What Is A Small Business Contract?
Under section 23(4) of the ACL, a small business contract is defined as a contract that:
- upon the time of entry, at least one party to the contract is a business that employs fewer than 20 persons;
- and the upfront price payable under contract does not exceed $300,000;
- or the contract is for 12 months and the upfront price payable does not exceed $1,000,000.
What Are The Changes and How Do They Affect Me?
The following proposed changes will take effect from the 5th of April 2021.
1. The Extension of UCT Laws Into Insurance Contracts
The first change to occur is the expansion of UCT laws to insurance contracts which are under the Insurance Contracts Act 1984. Section 15 of the Insurance Contracts Act will be amended and UCT laws will cover all types of general insurance, such as car, travel, life and home policies.
The only contract that will not be subject to UCT laws will be medical indemnity cover. Whilst this is a significant extension in protection, it must be noted that still many insurance contracts are not standard form consumer contracts or small business contracts.
In addition, new provisions will be introduced in the ASIC Act by the Financial Sector Reform Act, which will address contracts subject to the Insurance Contracts Act. The provisions will focus on three aspects:
- Prevent a term from being unfair due to a lack of transparency; a term must be expressed in plain language and a simple description may be added to prevent the risk of the language not being understood.
- Prevent a term from being unfair due to the description of the main subject matter of the contract; the main subject matter should include the risks of the policy rather than just the identity of the item or person.
- The ability for third party beneficiaries and parties of the insurance contract to challenge an unfair term in the contract.
2. The Expansion Of UCT Laws Towards Larger Businesses
The definition of a ‘small business contract’ is about to change:
- There will be no limit on the upfront price payable under the contract
- The current upfront price payable $300,000 for less than a year and $1,000,000 for a contract with a duration of 12 months and beyond.
- Businesses will be considered small businesses if they employ up to 100 employees (currently the maximum is 20) or the annual turnover of the business is less than $10 million.
These changes will provide protections for more businesses that find themselves subject to unfair terms..
3. Penalties For The Use Of An UCT
As of yet, we don’t know how big or how civil penalties will be calculated. However, we do know that they will be introduced with the coming amendments.
This encourages more transparency and deters business from slipping any UCTs into their contracts.
Currently, contract terms that are found to be unfair by the court are automatically void. Whilst the court can order compensation for losses suffered, the changes will allow the court to determine an appropriate remedy for the use of UCTs (rather than just declaring it void). .
5. Standard Form Contracts
The definition of a standard form contract in UCT laws is to be clarified. As mentioned above, there is currently no definition for a standard form contract, with the court relying on a series of factors when considering if a contract is in standard form. More certainty is to be given on those factors.
For example, one factor is whether a party was given an effective opportunity to negotiate the terms of a contract. The amendment is to include when certain conduct is not an effective opportunity to negotiate.
Change can sometimes be overwhelming, but there’s no need to stress. A review of your standard form contracts is a great start to maintaining compliance and making sure your contracts are free of UCTs. A review will also determine if any of your standard form contracts fall under the new definition of a small business, as the expansion of small business contracts means that further businesses can now be protected by UCT laws.
Don’t hesitate to reach out to our team of lawyers here at Sprintlaw on 1800 730 617 or at firstname.lastname@example.org for any of your concerns.
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