Unfair contract terms (UCTs) in standard form contracts will be outlawed and courts given powers to impose civil pecuniary penalties for contraventions, Treasury announced last week following a public consultation on ways to improve protections for small businesses and consumers.

The Insurance Council of Australia (ICA) says the looming changes could have “unintended ramifications” and McCabe Curwood Principal Mathew Kaley believes insurers will find it challenging to determine “what is an unfair contract term.”

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

Most standard form contracts are still filled with UCTs despite the introduction of protections more than 10 years ago for consumers and nearly four years since they were extended to small businesses, Treasury says in a Regulation Impact Statement.

Standard form contracts are a commonly used and cost-effective option when conducting business, as they avoid the transaction costs associated with negotiated contracts. However, such contracts are often offered on a “take it or leave it” basis and can be one-sided.

“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 impact statement.

For small businesses, Treasury says the introduction of unfair terms protections “did not provide strong deterrence against businesses using UCTs in their standard form contracts.”

“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,” Treasury said.

“Additionally, the review found that some aspects of the current regime appear to have created ambiguity, uncertainty and practical difficulties for businesses to comply with the law.”

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.

ICA spokesman Campbell Fuller told insuranceNEWS.com.au insurers are “concerned the proposed reforms could have unintended ramifications for the relationships between insurers and their small business customers.”

“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.”

Mr Kaley, who leads corporate advisory practice for law firm McCabe Curwood, says determining what is an unfair term “isn’t a black and white exercise”.

“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,” he told insuranceNEWS.com.au.

“It could encourage companies to be quite conservative with their contract terms, which could ultimately impact…the cover that is provided to customers.”

Treasury says the proposed actions have been approved 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.

Click here to access the Regulation Impact Statement on Decision.