Unfair contract terms and off-the-plan sales - revisited

Introduction

It has been almost three years since Australia's consumer laws were reformed by the introduction of the Australian Consumer Law (ACL) and with it, the unfair contract terms regime.¹ The ACL aims to improve and enhance standard form consumer contracts and is particularly concerned with providing consumers with increased protection against a power imbalance in favour of providers of consumer goods and services.

The Australian Competition and Consumer Commission (ACCC) has since undertaken a review of standard form contracts from selected industries and has recently published a report highlighting some of the key issues. Although the property industry was not one of the industries subjected to the ACCC's review, there are certain elements of this report that are nonetheless worth highlighting in the context of off-the-plan contracts for the sale of land, so as to minimise the risk of terms being rendered void for want of fairness to purchasers.

Standard form consumer contracts – a recap

Standard form consumer contracts are written or verbal contracts for the supply of goods and services, or the sale of an interest in land, to an individual for predominantly personal, domestic or household use or consumption and that are of a standard form. The term "standard form contract" is not defined in the ACL, however, the following factors are taken into account in making this determination:

• whether one of the parties has all or most of the bargaining power in the transaction
• whether the contract was prepared by one party before any discussion occurred between the parties about the transaction
• whether the other party was given any real opportunity to negotiate the terms of the contract
• whether the terms of the contract take into account the specific characteristics of the other party or the particular transaction.

In essence, it is a contract offered on a "take it or leave it" basis. Under the ACL, if a party alleges that a contract is a standard form contract, the burden is placed on the other party to prove otherwise.

What is an "unfair term"?

A term will be unfair if it satisfies all of the following criteria:

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

Whether a term of a contract is unfair will also depend on the transparency of the term along with the contract when considered in its entirety, as no term can be considered in complete isolation – a term that may appear to be unfair may in fact be reasonable in the circumstances of the particular transaction.

Property contracts and the ACCC's view

Although the property industry was not an industry targeted by the ACCC in its review, certain key issues highlighted by the ACCC are nonetheless relevant when considered in the context of standard form contracts for the sale of land. These issues are:

• contract terms that would allow a vendor to change the contract without the consent of the purchaser (this would include provisions which allow changing the location or boundaries of encumbrances affecting a lot or the finishes to a property)
• contract terms that unfairly restrict the purchaser's right to terminate the contract
• contract terms that suspend or terminate the contract (this would include termination rights granted to a developer to be exercised at its discretion if they decide not to proceed with the development)
• contract terms that prevent the purchaser from relying on representations made by the vendor or its agents outside of the written contract.

It is not uncommon to find all these terms in an off-the-plan contract for sale, but that does not necessarily mean that these terms will always be considered unfair and therefore void. Although the ACL cannot be contracted out of, there are certain measures that can be taken to reduce the likelihood of a purchaser making a claim under the ACL for an unfair contract term.

What should you consider when drafting contracts?

Most developers undertook a review of their standard form contracts for sale almost three years ago when the ACL was introduced. Although there have not been any decisions by the courts regarding unfair contract terms in contracts for the sale of land, previously acceptable market practices may have altered since 2010. We believe it would be prudent for developers to revisit their standard form contracts for sale and focus on:

• identifying any terms that may be considered "unfair" and whether these terms are reasonably necessary to protect the developer's interests
• whether there would be any detriment caused to the other party by the terms and, if so, consider how the term may be amended so that it becomes reasonable and fair
• giving a purchaser sufficient opportunity to review and negotiate the terms of the contract, or otherwise obtain an acknowledgement that the purchaser has read and understood the terms of the contract
• minimising the use of schedules, legalese and complex or technical language in the contract.

Footnotes

¹The ACL appears in Schedule 2 of the Competition and Consumer Act 2010 (Cth), with the unfair contract terms regime in Part 2-3.

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.