Government unveils draft reforms for unfair contract terms

The government flagged its intentions to develop the laws last year, after it noted unfair contracts terms (UCTs) are still prevalent despite protections being in place for 10 years.

The proposed changes would build on existing UCT protections in the ACL and ASIC Act.

They include:

• Prohibiting the use, application and reliance on an unfair term.
• Providing courts with the power to impose a financial penalty for a contravention.
• Expanding the protections to capture a larger number of small businesses.
• Creating a rebuttable presumption that a term is unfair if a court has already found a similar term used in similar circumstances is unfair.

The regime is also meant to cover more small businesses. The draft bill has removed the upfront contract value thresholds for the definition of a small business contract – which had been introduced in 2016 to limit the scope of the protections to low-value SME contracts.

Under the current restrictions, the upfront price payable under the contract cannot exceed $300,000 or if the contract had a duration of more than 12 months, the upfront price payable can’t exceed $1 million.

But the draft bill explanatory memorandum has argued that the thresholds have eroded due to the inflation in the cost of goods and services over time and are “now too low to take into account the range of contracts small businesses can enter into”. 

Further, the upfront price of a contract is not always available at the time of entering into a contract and may vary with market conditions.

The government has proposed amending the definition of a small-business contract, to require that one party in the agreement employs fewer than 100 persons or has an annual turnover of less than $10 million for the previous income year.

Rebuttable presumption switches onus of proof

The explanatory memorandum for the bill explores an example scenario where a bank and business sign an agreement for a loan. The contract includes a clause allowing the bank to unilaterally vary terms of the contract, including the upfront price, the financial services provided under it and other relevant terms – as long as the lender gives one-day notice to any variation taking place.

The business later sues the bank, with the court finding the terms to be unfair. The court says the terms allow the bank to vary the loan and reduce the amount of funds that the customer can use, while the notice period is too short and limits the business’ chances at refinancing.

If the bank tries to include the same clauses in a standard form contract with another business and it also takes the bank to court, it can rely on the rebuttable presumption to show the clauses are unfair and the onus lies on the bank to prove they are not unfair in court.

Bill consultation until 20 September

The draft bill is open for consultation, following on from an earlier consultation process on options to enhance the unfair contract terms protections.

Submissions close on 20 September.

The draft bill has followed a recent finding against Bank of Queensland, where the Federal Court ruled the lender had used unfair terms in standard form SME loan contracts.

The terms, which included unilateral variation clauses allowing BOQ to vary the terms and conditions of their contracts without giving borrowers advance notice or an opportunity to exit the contract without penalty, were ruled to likely cause a small business customer to suffer loss and damage.

The Federal Court also declared six Bendigo and Adelaide Bank loan contracts for small businesses void after finding the terms unfair in May, with its judge finding potential for detriment to the customers if the terms were relied on.

[Related: Parliamentary committee to probe housing affordability]