Article by Alison Deitz and Phillip Kong
On 11 May 2009, the Australian Federal Government released for public comment its consultation paper on draft national unfair contract terms provisions entitled "The Australian Consumer Law – Consultation on draft provisions on unfair contract terms".
The draft legislation is released following from the Productivity Commission's Review of Australia's Consumer Policy Framework in May 2008 and the subsequent Council of Australian Governments (COAG) agreement to implement a single national consumer law in October 2008. It is proposed that the new national consumer law be called the Australian Consumer Law. One of the changes under the Australian Consumer Law is to include provisions which regulate unfair terms in standard contracts, including loan contracts, lease contracts and finance broking contracts. A copy of the consultation paper can be accessed from the Treasury's website.
Proposed national unfair contract term provisions
The draft national unfair contract terms provisions are set out in the exposure draft of the Trade Practices Amendments (Australian Consumer Law) Bill 2009 which will amend the Trade Practices Act 1974 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and they include the following features:
- they will be implemented as part of the new Australian Consumer Law, generally, and as part of the ASIC Act, in respect of financial services (loan contracts will be regulated as financial services under the ASIC Act)
- they will apply to individual consumers as well as business-to-business transactions
- A non-exhaustive, indicative 'grey-list' of types of terms that may considered to be unfair – some examples of unfair terms:
- a term that permits, or has the effect of permitting, one party (but not the other party) to avoid or limit performance of the contract
- a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract
- a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract
- a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract
- a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract
- a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract
- a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the land to be sold or granted, under the contract
- a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning
- a term that limits, or has the effect of limiting, one party's vicarious liability for its agents
- a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party's consent
- a term that limits, or has the effect of limiting, one party's right to sue another party
- a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract
- a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract
- a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.
- It is not intended to ban unilateral variation
clauses. The Consultation Package states that:
"With respect to long-term and ongoing standard form contracts, many businesses have a legitimate need to amend terms in their contracts unilaterally in order to take account of market conditions.
"The inclusion of these examples is not intended to suggest or indicate a desire to prohibit unilateral variation terms, nor does the list have this effect. Indeed, the need for the unilateral variation of contract terms is expressly contemplated by legislation in specific contexts, including Division 1 of Part 4 of the Uniform Consumer Credit Code (UCCC). While unilateral variation clauses may be justified, such terms must be used in a manner which is reasonably necessary in order to protect the legitimate business interests of the party advantaged by the term".
- A regulation-making power for the Minister to prohibit terms in a standard-form contract that are considered to be, in all circumstances unfair;
- The exclusion of terms 'required, or expressly permitted, by a law of the Commonwealth or a State or Territory';
- It will apply to all:
- new standard-form contracts entered into on or after the commencement date (1 January 2010)
- contracts that are renewed or varied on or after the commencement date, to the extent of the renewal or variation.
Test for unfairness
- A term is deemed to be 'unfair' when:
- it causes a significant imbalance in the parties' rights and obligations arising under the contract; and
- it is not reasonably necessary to protect the legitimate interests of the supplier;
- There is a rebuttable presumption that a term is not reasonably necessary in order to protect the interests of the party who would be advantaged by the term, unless that party can prove otherwise. This has the effect that once the issue has been raised by a customer, the supplier must show, on the balance of probabilities, that the use of the term in the standard form contract was reasonably necessary to protect their legitimate business interests.
- In determining whether a term is unfair, the court may take into account such matters which it thinks relevant and it also must take into account the following matters:
- the extent to which it would cause, or there is substantial likelihood that it would cause, detriment (financial or otherwise) to a party if the term were to be relied on
- the extent to which the term is transparent
- the contract as a whole.
- Requirement to consider the "transparency" of the term:
- a term is transparent if it is expressed reasonably in plain language, legible, presented clearly and readily available to any party affected by them
- the transparency of a term is a consideration that a court must take into account when determining whether a term is "unfair".
- An unfair term of a standard form contract is void but the contract continues to bind the parties if it is capable of operating without the unfair term.
- The provisions relate only to standard-form contracts:
- Standard-form contract is not defined
- There is a rebuttable presumption that a contract is a standard-form contract in circumstances where it is alleged by the customer that a contract is in a standard form. The supplier must then show, on the balance of probabilities, that the contract is not in a standard form.
- In determining whether or not a contract is a standard-form contract, a court may take into account all the circumstances of the contract that it thinks relevant but must also take into account the following factors:
- One of the parties has all or most of the bargaining power relating to the transaction
- The contract was prepared by one party before any discussion relating to the transaction commenced
- Another party was required to accept or reject the terms in the contract in the form in which they were presented on a take-it-or-leave-it basis
- Another party was given an effective opportunity to negotiate the terms of the contract
- The terms of the contract take into account the specific characteristics of another party or the particular transaction
- Any other factors prescribed by regulations.
Upfront price of the goods or services
- The provisions exclude the upfront price of the goods or services - upfront price for loan contracts include interest rate and the repayment of both the principal and the interest of the loan.
The unfair contract terms provisions will be included in a Bill which is scheduled to be introduced into the Australian Parliament in June 2009. This legislation will also include new enforcement powers for the Australian Competition and Consumer Commission, another key plank in the Australian Consumer Law agreed by COAG in October 2008.
The unfair contract terms provisions are anticipated to commence on 1 January 2010 at the Commonwealth level. This would allow the state and territory governments to apply the provisions in their jurisdiction by the end of 2010.
As part of the COAG agreement on a national unfair contract terms provision, Australia's consumer enforcement agencies will issue common national guidance in relation to the enforcement of the unfair contract terms provisions. The national guidance will be available prior to the commencement of the unfair contract terms provisions.
What does this mean for you?
All businesses, including financial institutions and finance broking businesses, will need to review their terms and conditions in their standard contracts for all types of customers, including credit contracts, leases and finance broking contracts to ensure compliance with the new unfair contract terms provision.
Submissions close on the 22nd May 2009. Please let us know if you need our assistance in making a submission.
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.