November 2015
Practice Group(s):
Consumer Financial
Services
What You Need to Know - Unfair Contract Terms
Protection Starts 13 November 2016
By Andrea Beatty, Partner
Unfair terms in standard form contracts for consumers were outlawed in 2010. Now unfair
terms in standard form contracts for small business will be outlawed as of 13 November
2016.
Here, we set out what you need to know, and do, to achieve unfair contract terms for
small business (UCTSB) compliance.
Impact Summary
Standard form contracts for small businesses are still permitted after the commencement
of the UCTSB regime in November 2016. However, certain provisions will be unfair and
consequentially void and unenforceable, unless the commercial basis for those
provisions is explained. For example, absolute unilateral discretions for one party are not
permitted – their use must be restricted to specified circumstances. A clause restricting
such discretion could read:
The credit provider may amend the contract:
1) to comply with any change or anticipated changes in any relevant law, code of
practice or guidance
2) to reflect any decision of a court, ombudsman or regulator
3) to reflect a change in the credit provider's systems or procedures, including for
security reasons
4) as a result of changed circumstances, including by adding benefits or new features
5) to respond proportionately to changes in the cost of providing the loan
6) to make the loan contract clearer.
What are Unfair Contract Terms?
A term of a standard form contract with a small business is unfair if it:
•
would cause a significant imbalance in the parties' rights and obligations arising
under the contract
•
is not reasonably necessary in order to protect the legitimate interests of the party
who would be advantaged by the term
•
would cause detriment (whether financial or otherwise) to a party if it were to be
applied or relied on.
If a contract term is unfair and is included in a standard form contract it is void and
unenforceable.
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November 2016
The Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act)
includes an unfair contract terms regime in sections 12BF – 12BM which applies to
financial services and financial products (including credit), which is substantially the same
as the regime in the Australian Consumer Law (ACL).
ASIC is expected to provide guidance on the UCTSB regime.
What is a Standard Form Contract?
A contract sets out the legal relationship between two parties. The respective bargaining
power of parties to a contract is a critical factor when negotiating the terms of their
contract. Where there is an inequality in bargaining power the terms of a contract are
often set by the more powerful party in what is known as a standard form contract and is
offered to the less powerful party on a take it or leave it basis.
What is a Small Business Contract?
A small business contract is one where:
• the contract is for the supply of goods, services, including financial services and
products, including credit, or sale of (or grant of an interest in) land
• at the time the contract was entered into at least one party is a business employing
fewer than 20 persons (including not-for-profit businesses)
• the 'upfront price' payable is equal to or less than:
o AUD300,000
o AUD1,000,000 if the duration of the contract is more than 12 months.
The new UCTSB regime will apply to small business contracts from late 2016 that are:
• entered into
• renewed (to the entire renewed contract)
• varied (to the varied terms only).
The UCTSM regime will apply to standard form small business contracts entered into
between:
• a small business & non-small business (i.e. a large business)
• a small business & a small business
• a small business & a consumer.
What Must you do Before Late 2016?
It is expected that the UCTSB regime will commence on 13 November 2016
All businesses will need to review their standard form contracts and procedures relating
to small businesses to ensure they comply with the new regime. This is a similar review
to those undertaken in 2010 when unfair contract terms for consumers were introduced.
You should:
•
review your standard form contracts formation procedures
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•
amend or create UCTSB compliant business rules, with documented policies and
procedures
•
introduce any necessary computer system changes for example, where
information is pre-populated into contracts
•
create standard UCTSB compliant clauses to ensure these are consistently
applied across all your standard form contracts
•
appoint a UCTSB project leader
•
design and implement a compliance plan
•
train staff who will be handling standard form contracts
•
review arrangements with third parties who may assign standard form contracts
or other contractual relationships to your business for example, any dealers or
contractors.
What Happens if you Fail to Comply with the UCTSB Regime?
A Court can declare, under either the ASIC Act or the ACL that a contract term is unfair.
That term then becomes void and unenforceable. For example, the unfair term included a
fee or charge that could be unilaterally varied. If this fee is void and unenforceable then a
business would likely be required by the Court to refund that fee or charge to all customer
parties to that standard form contract.
Furthermore, while a term declared unfair will be void, the contract will continue to bind
the parties to the contract, to the extent that the contract is able to operate without the
unfair term. This means that if, due to the voiding of the unfair term a contract became
less commercial and the contract could not be terminated on some other ground, a
business may be stuck in that contract.
Other penalties include negative publicity, increased regulatory scrutiny, further Court
orders for other forms of redress, injunctions or any other order the Court sees fit to make
and penalties for misleading and deceptive conduct.
Practical tips for Achieving UCTSB Compliance
1. Understand the impact of UCTSB on your business
2. Develop a UCTSB checklist
3. Identify the contracts falling within the scope of your review
4. Classify clauses and develop pro forma clause solutions to apply across all
standard form contracts falling within the UCTSB regime
5. Review standard form contracts on a clause by clause basis
6. Create a process to identify small business customers each time a contract is
entered into, renewed or varied.
Further Information
If you would like more information on how your organisation can achieve UCTSB
compliance or you would like to receive a copy of our publication Small Business
Contracts – Unfair Contract Terms Protection – A Guide to What you Need to Know
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which provides further examples of UCTSB terms and compliance project tips, please
contact us.
Authors:
Andrea Beatty
Andrea.Beatty@klgates.com
+61.2.9513.2333
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