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Penalties for unfair contract terms – what is the government waiting for?

09 September 2019

#Construction & Infrastructure, #Corporate & Commercial Law, #Government, #Procurement

Scott Alden

Published by Scott Alden, Victoria Gordon

Penalties for unfair contract terms – what is the government waiting for?

Despite mounting pressure following the recent investigation of UberEats by the Australian Competition & Consumer Commission (ACCC), the Federal Government is yet to make good on its pre-election promise to strengthen the unfair contract term (UCT) regime.

In March earlier this year, the Federal Government announced that a Morrison Government would introduce amendments strengthening the current protections to all small businesses from UCTs, subject to the outcomes of a Regulation Impact Statement (RIS) consultation process.

The announcement followed the 2018 review of the existing UCT laws which found the UCT regime wanting of a strong deterrence for businesses not to use UCTs, therefore failing to provide appropriate protections to many small businesses.

One recommendation of the 2018 review was for the Government to consult on making UCTs illegal and introduce financial penalties for breaches of the UCT laws. Labor’s pre-election stance on the UCT laws was a more definitive commitment to make UCTs illegal and introduce penalties of up to $10 million for contracts that contain UCTs.

The Federal Government is starting to come under growing pressure to progress the RIS process.

Current regime

The UCT regime, in force since November 2016, applies to some ‘business to business’ contracts where at least one of the parties is a small business (20 or less employees), and where the up-front contract value is less than $300,000, or less than $1 million for contracts greater than 12 months.

Common unfair contract terms include:

  • rights for the contract provider to unilaterally vary contract terms
  • broad and unreasonable powers to protect a party against loss or damage at the expense of the small business
  • unreasonable ability to cancel or end an agreement. Under the current regime, a small business (or the ACCC on its behalf) may only seek to have a particular term void by a court or tribunal.

There are currently no provisions making UCTs illegal in the first place, and no penalties for businesses if a term is found to be unfair in breach of the law. Consequently, large corporates found to have UCTs in their contracts (including UberEats, Visy Paper and JJ Richards) are merely required to amend their contracts to remove the unfair term(s), but face no pecuniary penalty for the breach.

The case for penalties

It has long been argued that regulation without appropriate deterrence ‘lacks teeth’, and is ineffective at curbing the behaviour it was implemented to address. This is especially so in the UCT regime where the regulation is aimed at addressing large corporations taking advantage of their bargaining power with small businesses.

Making unfair contract terms illegal and introducing appropriate financial penalties will:

  • allow the ACCC to seek financial penalties and issue infringement notices when a business is found to have imposed UCTs
  • provide an effective deterrent for large corporates who are knowingly including UCTs in their contracts
  • provide an incentive for large corporates to proactively review and amend current contracts, rather than sitting on their hands until they are forced to do so after a term is found unfair by a court or tribunal
  • where a UCT is found illegal, provide precedents for other contracts which will inevitably have the flow-on effect of reducing UCTs
  • improve the confidence of small businesses to do business with large corporates
  • provide greater incentive for small businesses to bring claims against large corporates who are using UCTs to their advantage.

We are optimistic that the Federal Government will shortly announce the commencement of the RIS process so that a strengthened UCT regime that holds large corporates accountable can soon be implemented to afford appropriate protection for small businesses.

Authors: Scott Alden & Victoria Gordon

  • This article was originally published in Sourceable.

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The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Scott Alden

Published by Scott Alden, Victoria Gordon

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