Australian Competition and Consumer Commission (ACCC) - Enhancements to Unfair Contract Term Protections

23 Marcus Clarke Street

Canberra ACT 2601

GPO Box 3131

Canberra ACT 2601

tel: (02) 6243 1111

fax: (02) 6243 1199

www.accc.gov.au

EXECUTIVE OFFICE

Contact officer: Rami Greiss

Contact phone: (02) 6243 1226

23 March 2020

Mr Toby Robinson

Consumer Policy Unit

Market Conduct Division

The Treasury

Langton Crescent

Parkes ACT 2600

By email: uctprotections@treasury.gov.au

Dear Toby

Enhancements to unfair contract term protections – consultation regulation impact

statement

The ACCC welcomes the opportunity to make a submission in response to the

Enhancements to Unfair Contract Term Protections consultation regulation impact

statement. Our submission is attached to this letter.

The ACCC’s principal recommendation is that the inclusion of an unfair contract term in a

standard form contract should be a contravention of the Australian Consumer Law, and

subject to civil pecuniary penalties and other remedies commonly available for

contraventions of the Australian Consumer Law.

An express prohibition backed up by effective remedies will not only provide a direct

incentive for compliance, it is also fundamental to promoting an ongoing culture of

compliance to ensure that consumers and small businesses receive the protections of the

unfair contract terms laws.

If you wish to discuss any aspect of the attached submission, please contact Rami Greiss,

Executive General Manager, Enforcement Division on (02) 6243 1226 or

rami.greiss@accc.gov.au.

Yours sincerely

Delia Rickard

Deputy Chair

Enhancements to Unfair

Contract Term Protections

Consultation Regulation Impact Statement

ACCC submission

March 2020

Enhancements to Unfair Contract Term Protections 1

1. Introduction

The Australian Competition and Consumer Commission (ACCC) welcomes the

Government’s commitment to enhancing the unfair contract terms (UCT) regime, and the

opportunity to make a submission in response to Treasury’s consultation regulation impact

statement (CRIS).

The ACCC is an independent Commonwealth statutory authority responsible for enforcing

the Competition and Consumer Act 2010 (Cth) (CCA), which includes the UCT regime in the

Australian Consumer Law (ACL). By doing so, we promote fair trading, consumer protection,

and competition for the benefit of all Australians.

Parliament introduced the UCT regime in 2010 to protect consumers entering standard form

contracts. In 2016, the protections were extended to some business-to-business contracts,

given that small businesses, in a similar way to consumers, often lack the bargaining power,

expertise, and ability to negotiate or assess the standard form contracts they enter. UCTs

often allocate risks to the party that is least able to manage them. The UCT provisions are

intended to deter the inclusion of UCTs in standard form contracts, but in the ACCC’s view,

they have not fully achieved this objective.

This submission will address the following key points:

 The need for an express prohibition and effective remedies – The ACCC considers

that the most important change needed to increase the effectiveness of the UCT

regime is to expressly prohibit the inclusion of UCTs in standard form contracts and

provide for civil pecuniary penalties. This will provide a significant and ongoing

incentive for businesses offering standard form contracts to ensure their contracts do

not contain UCTs. It will also provide the ACCC, State and Territory Fair Trading

agencies, and contract recipients a broader range of effective tools to address UCTs.

The ACCC also supports UCTs not automatically becoming void, and aligning the

remedies for non-party small businesses with those available to non-party

consumers.

 Clarifying the UCT regime – This section provides the ACCC’s views on clarifying the

application and operation of the UCT regime, including our support for replacing the

current headcount threshold with a turnover threshold, removing the value threshold

for small business contracts, and making ‘repeat usage’ of a contract a mandatory

factor for a court to consider in determining whether the contract is a standard form

contract.

The ACCC is happy to discuss any of the views put forward in this submission.

2. The importance of an express prohibition and effective

remedies

Unfair contract terms are causing real detriment to consumers and small businesses around

Australia. However, the lack of an express prohibition and effective remedies significantly

limits the protections that the current UCT regime provides. Currently, businesses have little

incentive to proactively ensure their contracts do not contain UCTs. An express prohibition

backed up by effective remedies will not only provide a direct incentive for compliance, it is

also fundamental to promoting an ongoing culture of compliance.

Enhancements to Unfair Contract Term Protections 2

2.1. Making the inclusion of UCTs a contravention

The ACCC strongly supports making the inclusion of UCTs in both business-to-consumer

and business-to-business standard form contracts an express contravention of the ACL and

subject to civil pecuniary penalties.

This is our principal recommendation, as it was in

December 2018.

The ACCC agrees with the statements in the CRIS that a central reason that UCTs remain

widespread is that the current regime provides little incentive for businesses to ensure that

their standard form contracts do not contain UCTs.

The ACCC has taken a range of compliance and enforcement actions under the UCT laws.

There has been minimal action taken by private litigants. Based on our experience, the

majority of UCTs go undetected and are readily relied upon by the businesses offering them.

In relation to those matters where the ACCC takes action, the only real consequences for

the contract-issuing party is the inconvenience of engaging with the ACCC to amend the

unfair terms or, in a small number of cases, having a court declare a term unfair and

therefore void, and then having to amend the contracts.

This places a significant burden on regulators to detect and take action in relation to UCTs,

while providing no incentive for contract-issuing businesses to proactively assess their

standard form contracts. The contract-issuing business, as the drafter of the standard form

contract, is best placed to ensure that the contract is free from UCTs, and is in the best

position to:

 determine what risk allocation is efficient and fair under the contract

 align the obligations under the contract with its own business practices

 know which contract terms it is willing to negotiate

 foresee whether it or a small business customer or consumer should carry the risks

incurred by a potential UCT, and

 know other risk mitigation strategies that could be adopted.

Amending the ACL to allow the court to impose civil pecuniary penalties against contract-

issuing businesses would not produce unreasonable outcomes. The ACCC (and other

relevant regulators, and consumers or small businesses who may take action alleging a term

is a UCT) would still be required to establish that the term causes a significant imbalance in

the parties’ rights and obligations, that it is not reasonably necessary to protect the legitimate

interests of the party advantaged by the term, and that it causes or would cause financial or

other detriment to the other party to the contract if it were relied on.

Further, as with all other pecuniary penalties, the court would need to be satisfied that

imposing a pecuniary penalty is appropriate in the circumstances of any individual case, and

determine the appropriate penalty.

As noted above, this is our principal recommendation on the issues raised in the CRIS.

Without changes to expressly prohibit the inclusion of UCTs in standard form contracts and

provide for civil pecuniary penalties, in our view the other changes discussed in the CRIS will

be of limited utility. However, the ACCC has set out views on these other changes below on

the assumption that these changes may be made in addition to an express prohibition with

civil pecuniary penalties attached.

Chapter 4, Option 3 of the CRIS.

ACCC, Review of Unfair Contract Term Protections for Small Business, submission, 21 December 2018, p.2.

CRIS, p.13.

Enhancements to Unfair Contract Term Protections 3

2.2. Infringement notices

The ACCC supports giving regulators the power to issue infringement notices to further

strengthen the deterrence effect of the regime.

Infringement notices can provide a timely

and cost-effective enforcement outcome in relation to potential contraventions involving

isolated or non-systemic conduct and less severe levels of consumer or small business

detriment. Infringement notices can also be combined with court-enforceable undertakings

offered by businesses under section 87B of the CCA in order to effect changes to

businesses’ practices, in addition to addressing past conduct. Infringement notices add

flexibility to the regulatory toolkit, allowing regulators to proportionately and appropriately

tailor enforcement responses to the full array of circumstances. The power for the ACCC to

issue infringement notices for alleged UCTs should be consistent with the ACCC’s current

infringement notice provisions in sections 134-134G of the CCA, noting that parties issued

with infringement notices are able to challenge their validity in the courts.

2.3. Automatic voiding of UCTs

The ACCC supports amending the UCT regime so that a UCT is not automatically void.

Automatic voiding can result in uncertain or unintended consequences for the parties. As

such, the ACCC supports the court having the power to determine appropriate remedies,

including whether the term is void or whether it should be varied.

For example, where there is a potential UCT in relation to the termination of a contract, such

as imposing unreasonable or disproportionate costs to terminate the contract or an

unreasonable notice period, it is currently unclear how the contract would operate if the term

were declared a UCT and therefore void, i.e., whether it would continue indefinitely, which

could result in a contract that is even more unfair for the consumer or small business.

While in such circumstances, a court may determine that the relevant contract is not

‘capable of operating’ without the void term, there has been little judicial consideration of

this. This creates uncertainty for all parties to the contract.

Similarly, if the entire contract is found not ‘capable of operating’ without the void term, this

can also have a detrimental impact on all parties to the contract, but particularly to the

parties that are small businesses or consumers. There can be meaningful transaction and

administrative costs involved in signing up to a new contract and the business imposing the

standard form contract may refuse to supply critical goods or services to a consumer or

small business (or acquire critical goods or services from a small business) until they sign a

new contract.

Removing the automatic voiding of a UCT and empowering the court to determine the

appropriate remedy, including the power to vary the term, would allow for a more just,

flexible, and mutually beneficial outcome.

2.4. Non-party small business remedies

The ACCC supports aligning the remedies for non-party small businesses with those that

currently exist for non-party consumers,

in particular through providing courts with the ability

to make orders relating to non-party small businesses that have had a UCT included in their

contract.

Chapter 4, Option 4a of the CRIS.

Chapter 5, Option 2 of the CRIS.

Chapter 5, Option 3 of the CRIS.

Enhancements to Unfair Contract Term Protections 4

This option would not require a significant change to the legislation, but could be achieved

with a simple amendment to section 239 of the ACL, and would benefit small businesses

and make enforcement action more effective, increasing the efficacy of the UCT regime.

2.5. Rebuttable presumption for re-used UCTs

The ACCC supports creating a rebuttable presumption that a contract term in a standard

form consumer or business contract would be considered a UCT if it were the same or

substantially similar to a term which had been used by the same entity or in the same

industry sector and had previously been declared a UCT.

This presumption would give

greater certainty to consumers and small businesses and make it easier for them to

effectively enforce their rights under the UCT regime. Further consideration will need to be

given to how to appropriately frame any such rebuttable presumption to ensure the scope is

appropriate.

3. Clarifying the UCT regime

Some aspects of the UCT regime have created ambiguity, uncertainty, and practical

difficulties for business to comply with the law, as noted by the CRIS.

The ACCC supports a

range of enhancements to ensure that the UCT regime aligns with its original policy intent of

providing for more efficient contracting and risk allocation, including by ensuring the small

business thresholds appropriately and clearly protect those small businesses who need its

protection. The ACCC considers that the UCT regime should be as clear and simple to

understand as possible so that large and small businesses alike can easily understand their

rights and obligations.

3.1. Definition of a small business

The ACCC supports replacing the current definition of a small business based on headcount

with one based on turnover, where a party will be a “small business” for the purposes of the

UCT regime if it has an annual turnover of less than $10 million.

In the ACCC’s experience, the current headcount threshold has not successfully captured

the full range of small businesses that need the protections of the UCT regime. In our

experience, there are a number of industries, such as hospitality and agriculture, where

unfair terms in standard form contracts are common and cause real detriment, yet some

affected small businesses are excluded from the protections of the UCT regime due to the

high number of seasonal or casual workers that they employ. The exclusion of these

businesses is often inappropriate, because, regardless of their employee numbers, they

have the characteristics which the UCT protections were designed to mitigate: limited or no

countervailing bargaining power and limited or no ability to effectively negotiate a standard

form contract.

Further, the current headcount threshold has led to uncertainty about the coverage of the

UCT regime. This uncertainty hinders compliance with the law. It is difficult for a contract-

issuing party to determine the other party’s employee numbers, and it is often not easy for a

small business itself to determine whether its seasonal or casual workers meet the UCT

regime’s test of being ‘employed on a regular and systematic basis’.

Chapter 5, Option 4 of the CRIS.

CRIS, p.4.

Chapter 6, threshold Option 2 of the CRIS.

Section 23(5) of the ACL.

Enhancements to Unfair Contract Term Protections 5

The ACCC considers that replacing the current headcount threshold with a $10 million

annual turnover threshold will provide a clearer and more effective threshold. Firstly, since

the $10 million threshold aligns with the ATO’s small business tax concessions threshold, a

small business is more likely to already know whether it meets that threshold for tax

purposes. Secondly, the ACCC considers that a turnover threshold will more appropriately

align the UCT protections with those businesses who need the protection, including small

businesses that operate in labour-intensive but low-revenue industries.

3.2. Contract value threshold

The ACCC supports removing the value threshold for small business contracts to be covered

by the UCT regime.

Instead, we consider the UCT regime should rely on whether the

contract-receiving party is a small business (under the turnover threshold discussed above)

and whether the contract is a standard form contract.

The original rationale for including a contract value threshold was the ‘moral hazard’

problem, where a small business might deliberately not conduct appropriate due diligence

(principally, seeking legal advice) for a high-value contract, knowing that they may later be

able to rely on the UCT protections.

The ACCC considers that this concern is misconceived. The UCT regime is intended to

protect consumers and small businesses who have no meaningful choice about whether or

not to enter a standard form contract and no power to negotiate the terms of that contract.

Where the consumer or small business is able to meaningful negotiate the terms of a

contract, the UCT regime is not engaged, regardless of the value of the contract.

Where a small business has no effective opportunity to negotiate a standard form contract

and has no meaningful choice about whether to enter into the standard form contract, then

regardless of the value of the contract, the ACCC considers the UCT protections are

necessary and appropriate.

Due diligence steps, such as seeking legal advice, do not change the position of a small

business where it has no effective opportunity to negotiate a standard form contract. This

position is particularly exacerbated in concentrated industries where small business

suppliers or acquirers lack viable alternatives.

Further, we have seen no evidence that the UCT regime has disincentivised consumers or

small businesses from conducting appropriate due diligence. If there is any disincentive, we

expect it comes from the lack of an effective opportunity to negotiate and the lack of a

meaningful choice about whether or not to enter the contract, rather than from the existence

of a UCT regime.

3.3. Consideration of ‘repeat usage’

The ACCC supports including ‘repeat usage’ by a business of the same, or substantially the

same, contract as a mandatory factor that a court must consider in determining whether

business-to-consumer and business-to-business contracts are standard form contracts.

3.4. Application to insurance contracts

The ACCC supports extending any enhanced protections in the UCT regime that result from

this CRIS process to insurance contracts as appropriate.

Chapter 7, Option 3 of the CRIS.

Chapter 8, Option 2 of the CRIS.

See also, ACCC, Extension of unfair contract terms protections to insurance contracts, submission, 23 August 2018.

Enhancements to Unfair Contract Term Protections 6

The ACCC welcomes the commencement, on 5 April 2021, of the extension of UCT

protections to insurance contracts.

The harms from UCT protections not applying to

insurance contracts were noted in our Northern Australia Insurance Inquiry, and the

extension of the UCT regime was a recommendation in the ACCC’s first interim report.

3.5. Clarity on an whether a contract is standard form

The ACCC considers there could be better clarity in the list of matters for a court to consider

when determining whether business-to-consumer and business-to-business contracts are

standard form contracts, including but not limited to the ‘effective opportunity to negotiate’

factor.

The ACCC considers that a simple way to clarify the list of matters would be for sections

27(2)(c), (d) and (e) of the ACL to be amended to remove the phrase “another party”, and

the sections be redrafted to make it clear that those factors must be assessed in the context

of the relationship and negotiations between the contract-issuing party and the specific

consumer or small business in question in the proceedings.

Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020,

Schedule 1.

ACCC, Northern Australia Insurance Inquiry - First Interim Report, 18 December 2018.