Introduction

The Australian Competition and Consumer Commission (ACCC) has exercised its powers for the first time to take action against a business that it considers has sought to enforce unfair contract terms. Two recent cases – one in Australia and one in the UK - shed light on the types of contract terms that may be likely to attract regulatory attention.

Recap of the "unfair contract terms" law

A national regime prohibiting the enforcement of "unfair contract terms" in standard form contracts was introduced in July 2010. The regime is contained in The Australian Consumer Law (ACL), Schedule 2 to the Competition and Consumer Act 2010 (Cth) and applies to all standard form contracts entered into on or after 1 July 2010.

The aim of the "unfair contract terms" law is to address the imbalance in negotiating power that allows one party to include in a standard form contract a term that is "unfair". Broadly speaking, a standard form contract is one that is pre-prepared by one party to the agreement and whose terms are not open to negotiation by the other party. A term will be unfair if the term:

  1. would cause significant imbalance in the parties' rights and obligations under the contract;
  2. is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  3. would cause detriment to a party if it were to be applied or relied upon.

Under the ACL, an unfair term included in a standard form contract will be void.

Click here for further detail regarding the unfair contract terms law.

First Australian case

The ACCC has taken action under the unfair contracts provisions against NRM Corporation Pty Ltd and NRM Trading Pty Ltd (collectively NRM), which acquired the "AMI" business. The contract in question is a long term consumer contract regarding the provision of medication and services to treat male sexual dysfunction.

Under the contract's terms, the customer is required to give 30 days' written notice in order to terminate the contract and, in doing so, becomes liable to pay a number of fees including a fixed administrative fee of 15 per cent of the contract's price. The ACCC alleges that the fees act as a penalty against a consumer who terminates the contact, causing a significant imbalance in the parties' contractual rights.

The matter is being heard in the Federal Court in Melbourne, and its outcome will provide guidance to businesses about what a Court considers does and does not constitute an "unfair term" in a standard form contract

UK guidance

Unfair contract terms provisions similar to the Australian provisions exist in the United Kingdom, and were recently used as the basis for action in Office of Fair Trading v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch). Although Australian courts are not bound by the UK courts' decision, the case provides insight into how the ACCC and courts might assess the fairness of a contract term.

The alleged unfair terms were contained in a standard form consumer contract used by a company that managed the memberships of gym and health club service providers. Among the terms held to be unfair were those that:

  1. locked consumers into a fixed membership period of one year or more (with termination triggering an obligation to pay all fees payable during the minimum period), as such terms took advantage of a prospective member's tendency to overestimate how often they would use the gym at the time of taking up a membership. The circumstances in which a customer can terminate or suspend their membership, and any termination fees payable, are relevant to this decision;
  2. imposed a termination fee based on the number of monthly payments left under the contract's term, with no discount of the fee for accelerated payment; and
  3. permitted the contract to be terminated by the service provider for minor breaches, such as several days' late payment, by the consumer.

Conclusion

As the ACCC turns its focus towards businesses that seek to enforce unfair contract terms, it is a timely reminder for companies to "sanity check" their standard form consumer contracts. Click here for a checklist of "recommendations for businesses" in relation to the review process. Preventative measures taken now can avoid ACCC attention and action, and the consequences of a term of a standard form contract entered into by large numbers of consumers being unenforceable, and the accompanying adverse publicity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.