New unfair contract terms laws could cause headaches for SMEs

Small and medium businesses are being warned to prepare for a barrage of legal action over “unfair” contract terms under new legislation to be introduced to Parliament in the coming months.   

Federal Assistant Treasurer Chris Bowen is in the process of drafting legislation to protect consumers from unfair contract terms, such as unfair exit fees, penalty fees and clauses that permit one party to unilaterally change or cancel a contract.

Bowen’s new national laws would replace the hodge-podge of state laws currently governing this area, and would give greater powers to the Australian Competition and Consumer Commission to police the new regulatory framework.

The laws are only aimed at fixing problems with standard-form contracts – that is, contracts where there are no negotiations to be entered into.

These contracts are used in a huge variety of sectors, including utilities, telecommunications, software, gyms, banking and finance, leases, professional services, subscription services, training and even car rentals.

While the laws are primarily aimed at consumers, Nick Abrahams, partner with law firm Deacons, says there is a huge number of businesses that will be exposed to the changes, both as customers using standard contracts and suppliers offering standard contracts.

While he recognises the need for greater protection for consumers, he says it’s “entirely another proposition that there should be an extension of the contract terms regulation into business-to-business relationships”.

Abrahams believes the introduction of the new legislation, which Bowen wants to have in operation by 1 January 2010, has the potential to increase costs for businesses sharply. Legal costs are likely to rise if existing contract terms are challenged and new contracts need to be drawn up. Businesses could also see costs for goods and services rise if suppliers are forced to mitigate their risk by increasing prices.

“It’s going to lead to a terrific amount of uncertainty as companies try to understand what sort of circumstances constitute unfair contracts and what sort of terms are deemed to be unfair,” Abrahams says.  

“The flow-on effect of uncertainty is risk, and risk is abated by cost increases.”

The devil is likely to be in the legislation, particularly around the definitions of an unfair term. “Is a $35 exit fee unfair? Or is a $25 fee unfair?” Abrahams asks.

 
Federal Tresury’s discussion paper on the new consumer laws sets out a raft of terms it suggests could be banned. These include a number of commonly used terms such as:

• Terms that allow a business to retain the title to supplied goods, allowing the supplier to reclaim goods that aren’t paid for (this is also known as a Romapla clause).
• Terms under which consumers acknowledge that they have read or understood the contract.
• Flat or fixed early termination fees and those requiring the paying out of the contract.
• Terms allowing suppliers to retain amounts paid by consumers to defray unpaid amounts, or to debit consumers’ accounts for unpaid amounts.

Bowen is looking at the idea of a blacklist of banned terms, or a “greylist” of terms that the regulator would have concerns about but could be allowed by a court in certain circumstances.

Abrahams does not like the idea of a blacklist, and says it would mean terms that are commonly used in non-standard contracts – like termination fees – would be under question.

He says lawmakers also need to be a careful that contracts can allow for a degree of flexibility, particularly in business relationships.

A spokesman for Bowen says the Minister is continuing to work on the legislation and the all-important transitional arrangements that will govern standard-form contracts already in place.

Given Bowen’s desire to have the laws in place by the start of next year, Abrahams says it is unlikely that interested parties will get to see draft legislation.

“This is a pretty significant change to consumer laws, and that’s a very, very swift timetable,” he says.

His message to SMEs – keep a very close eye on this process. “It’s definitely going to have an impact one way or another, so I think that SMEs will need to be monitoring what’s happening.

“You are going to need to look at your standard form agreements in the next six-to-nine months to make sure they are compliant.”

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