In August 2021, ASIC announced a plan to introduce changes to the Unfair Contracts Regime. While these changes are not in force yet, if approved, the changes will extend the coverage of the regime and the penalties that will apply. This will significantly increase regulatory risk for businesses.
Now that we are settled into 2022, we feel it is a good time to consider whether the contracts you are currently using in your business are still fit for purpose and whether they will be lawful and enforceable.
What is the Unfair Contracts Regime?
The Unfair Contracts Regime provides protections for customers against unfair contract terms. These are terms that cause a significant imbalance between parties and that are not reasonably necessary to protect the legitimate interests of the advantaged party. These terms usually also cause detriment to the disadvantaged party.
Terms that relate to the main subject matter of the contract or that are permitted by law will continue to be safe from the regime.
The regime will only apply if your customers are consumers or small businesses (as defined in the regime).
What are the changes?
- Small business coverage: the meaning of small business will be extended to include businesses with less than 100 employees (rather than 20), or a business whose annual turnover does not exceed $10 million.
- Insurance contracts: general insurance contracts entered after 4 April 2021 will also be included. The fairness of an insurance contract can be challenged by the customer/insured or a third-party beneficiary to the policy.
- Contract price: the changes will remove the threshold contract price that determines whether the regime will apply to a contract. This means that contracts of any value will be caught.
- Penalties: the use of unfair terms will be considered unlawful and not just unenforceable. This means that civil penalties will apply if a contravention occurs. The maximum penalty for a corporation is $10 million, 3 times the benefit of the contract; or 10% of the annual turnover of the corporation. The maximum penalty for individuals is $500,000. Important to note here is that there can be more than one contravention in the same contract – and multiple penalties!
- Other remedies: apart from civil penalties, courts will also be able to make orders for damages, orders to void, vary or refuse all or part of the contract, or an injunction to stop future entry into a contract with the same or similar terms.
- Rebuttable presumptions: the changes will introduce a new rebuttable presumption which will become problematic for businesses that has standard form contracts. The presumption will have the effect of deeming a term to be unfair if it is the same as or substantially similar to a term already determined by a court to be unfair by the same offender or one in the same industry. This presumption can be rebutted.
Although the changes are not yet in force, it is a good time to consider whether your business contracts are still appropriate and whether any of the proposed changes will affect your contracts.
We will continue to keep you updated on any changes to the legislation.
If you would like to discuss any of the above, please contact the Osborn Law Commercial team on (02) 4927 2900.
