Treasury has announced plans to outlaw unfair contract terms (UCTs) following a public consultation on ways to improve the existing UCT framework’s protections for small businesses and consumers who sign on to standard form contracts.

Courts will also be given powers to impose civil pecuniary penalties for UCT contraventions, Treasury says.

It says the proposed actions, outlined in its Regulation Impact Statement for Decision, have been approved last Friday by consumer affairs ministers at the Commonwealth, state and territory levels. The next step will see Treasury developing exposure draft legislation for consultation with stakeholders.

Insurance Council of Australia (ICA) has expressed worries over the plan to introduce penalties for UCT contraventions as well as a blanket prohibition of terms.

“The ICA’s submission to the first part of the consultation process advocated for careful consideration of penalties and a blanket prohibition of terms,” spokesman Campbell Fuller told insuranceNEWS.com.au today.

“The ICA is concerned that the proposed reforms could have unintended ramifications for the relationships between insurers and their small business customers.

“The ICA will now work with members to consider how an expanded regime, as proposed by the latest Treasury consultation, would apply to small business insurance contracts.”

According to Treasury, the reforms are necessary in order to reduce the prevalence of UCTs in standard form contracts and improve consumer and small business confidence.

Treasury says UCTs are still prevalent in contracts more than 10 years after the introduction of protections for consumers and nearly four years since they were extended to small businesses.

“Stakeholders advise that the current approach (involving voiding UCTs) is ineffective and that contract-issuing parties are able to capitalise on the typically weaker bargaining position of consumers and small businesses by including UCTs in their contracts,” Treasury says in the regulation impact statement.

“As small businesses generally lack the resources and bargaining power to effectively review and negotiate contract terms or challenge their enforcement, some contract-issuing parties have continued to exploit this power imbalance when issuing standard form contracts.”

At present the law provides that if a court or tribunal finds a term is "unfair", it is void and the rest of the contract will continue to bind the parties if it can operate without the void term.

McCabe Curwood Principal Mathew Kaley says the real challenge for insurers and other industries lies in “determining what is an unfair contract term”.

“It isn’t a black and white exercise,” Mr Kaley told insuranceNEWS.com.au today. “The rules are such that it is quite a challenging process to identify whether a term is unfair or not and to make it unlawful and to potentially apply a pecuniary penalty to the existence of unfair contract terms does raise some challenges.

“And it could encourage companies to be quite conservative with their contract terms which could ultimately impact in insurers’ case the cover that is provided to customers.”

The Consumer Action Law Centre has welcomed the proposed actions.

“These reforms will finally give our laws against ‘unfair contract terms’ teeth,” Senior Policy Officer Cat Newton told insuranceNEWS.com.au. “Making unfair terms illegal, and applying civil penalties for any breach, will mean insurers can’t keep relying on unfair terms to deny and underpay insurance claims.

“If doing the right thing wasn’t enough of a reason, then the risk of large penalties should now incentivise insurers to remove all unfair terms from their policies.”

Click here for Treasury’s Regulation Impact Statement for Decision.