Australia: Unfair Consumer Contracts Bill

Last Updated: 24 August 2009

Article by Matthew Morosin

Does your business supply goods or services to individual consumers using non-negotiable contracts? Does your website have a terms of use? Do you currently use standard form engagement letters, or shrink wrap end user agreements? If you have answered 'yes' to any of the above questions, you may have to review and amend your current suite of standard-form contracts to ensure that they comply with the recently proposed unfair consumer contract laws.

On 24 June 2009 the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Bill) was introduced into Federal Parliament. The Bill deals with unfair and prohibited terms in consumer contracts and seeks to amend the Trade Practices Act 1974 (Cth) (TPA) and Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act).

The Bill proposes to deem that unfair terms in all standard-form consumer contracts are void. The Bill intends to only operate to invalidate the unfair term or unfair terms in a standard-form contract - if the contract can continue to operate without the unfair terms, the parties will continue to be bound by their remaining obligations under the agreement.

The regulations proposed by the Bill are intended to be effective from 1 January 2010 and will only apply to standard-form contracts which are entered into, renewed or varied after this date.

Unfair terms

'Unfair terms' are defined in the Bill as terms in a standard-form contract that would cause a significant imbalance in the parties' rights and obligations under the contract, while not being reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term. Whether a particular term is an unfair term will depend on the detriment (or substantial likelihood of detriment) caused to a party if the term was enforced, the transparency of the term (ie whether the term is written in reasonably plain English and readily available to a party affected by the term) and the nature of the entire contract as a whole.

Examples of unfair terms may include:

  • a clause in a website's terms of use that permits, or effectively permits, the website operator to unilaterally vary the terms of use at any time without notice to the user;
  • a term in a supply agreement which permits, or effectively permits, the supplier to assign the contract to the detriment of the other party, without the other party's consent;
  • a term in a contractor's agreement which limits, or effectively limits, the ability of the business to sue the contractor; and
  • a franchise agreement that limits, or effectively limits, the evidence a franchisee can adduce in proceedings relating to the franchise agreement.

The Bill also proposes that during proceedings, the court will be able to take into account any other matters which it deems relevant to determine whether a particular term is fair.

Consumer contract

The Bill intends to only apply to contracts that are 'consumer contracts'. Consumer contracts are contracts for the supply of goods or services, or the sale or grant of an interest in land, to an individual, where the individual acquires those goods, services or interests in land for wholly or predominantly personal, domestic or household purposes.

Contracts of service (such as employment contracts) are not consumer contracts for the purposes of the Bill, nor are contracts for marine salvage, towage or carriage of goods by ship and constitutions of companies, managed investment schemes and other bodies.

Standard-form contract

In addition to being a 'consumer contract', a contract also needs to be a 'standard-form contract' to fall within the scope of the Bill.

While 'standard-form contract' is not expressly defined in the Bill, the following may be indicative that a contract is a standard form-contract:

  • one party had most or all of the bargaining power in relation to the contract;
  • one of the parties prepared the contract before both parties discussed the transaction;
  • the contract was offered on a 'take it or leave it' basis;
  • there was limited or no opportunity for the parties to negotiate the terms of the contract; and
  • the terms of the contract do not relate to the specific characteristics of a party or the particular transaction.

Examples of standard-form contracts may include the terms of use for a website, a contract for a mobile phone or pay television plan, car hire agreements, terms and conditions for credit cards and bank accounts, shrink wrap software end user agreements and the conditions of an auction.

What is the impact of the Bill?

A primary consequence of the Bill is that it introduces two rebuttable presumptions in relation to standard-form contracts and unfair terms, which businesses must overcome if they wish to establish that a particular term in their contract is not an unfair term.

Firstly, if a party during proceedings alleges that a contract is a standard-form contract, the contract will be presumed to be a standard-form contract unless the opposing party can prove otherwise. Accordingly, businesses must be able to demonstrate to the court that each party to a particular contract had equal bargaining power and opportunity to influence the terms of the agreement if they wish to establish that the contract was not a standard-form contract.

Similarly, it is presumed that a term of a consumer contract is not reasonably necessary to protect the legitimate interests of the advantaged party - the party seeking to enforce or retain a term must show, on the balance of probabilities, that the term is reasonably necessary to protect their legitimate business interests.

Businesses should accordingly review all standard-form contracts which they currently use to ensure that they contain no terms which may be considered as 'unfair' under the Bill.

Exempt terms

Some terms of standard-form consumer contracts are exempted from the proposed unfair terms legislation. Terms which define the main subject matter of a standard-form contract are exempt from the Bill, as well as terms which relate to the 'upfront price' payable under the contract, and terms which are required or expressly permitted by law.

The upfront price of a contract relates to the consideration provided in exchange for the
supply or sale made under the contract, and must be disclosed before or at the time the contract is entered into. Terms that describe payments which are contingent upon particular events occurring or not occurring do not constitute part of the upfront cost and accordingly are subject to the unfair contracts laws. For example, a consumer could not challenge the price he or she pays as consideration for the provision of goods under a contract, but a term which requires a consumer to pay an excessively high fee for early termination of the contract may be classed as an 'unfair term' under the Bill.

Penalties proposed by the Bill

The Bill introduces new penalties and provides the ACCC and ASIC with a sizeable arsenal of enforcement alternatives to deal with contraventions of the proposed Bill. These include:

pecuniary penalties of up to $1.1 million for companies and $220,000 for individuals (multiple pecuniary penalties can only be ordered in relation to multiple acts or omissions by a company or individual, not multiple contraventions of the Bill resulting from a company's or individual's single act);

  • the ability to make applications to the court for orders that:
  • disqualify a person from managing a corporation, if that person has committed, attempted to commit or was involved in a contravention of the proposed laws; or
  • require a person who has committed or was involved in a contravention of the proposed laws to redress any loss or damage suffered by a class of persons who are not party to the enforcement proceedings (excluding an order for damages). The ACCC or ASIC must establish that the contravening conduct caused, or is likely to cause, loss or damage to that class of persons;
  • issuing substantiation notices that require a person to substantiate to the ACCC or ASIC any claim or representation made in relation to promoting or intending to promote:
  • the supply or intended supply of goods or services;
  • a sale or grant, or possible sale or grant, of an interest in land; or
  • employment that is, or may be, offered by a corporation;
  • issuing infringement notices if there are reasonable grounds for believing that a person has breached a proposed provision; and
  • issuing public warning notices if there are reasonable grounds for suspecting that the conduct of a corporation may breach proposed provision contained in the Bill, and it is likely that one or more persons has suffered, or is likely to suffer, detriment as a result of the conduct. It must also be in the public interest for the warning notice to be issued.

Swaab was recently named a 2009 Winner in the ALB Employer of Choice awards, and was winner 'Best Law Firm in Australia (Revenue < $20m)' and 'Attribute Award for Exceptional Service (Australia Wide)' in the 2008 BRW- Client Choice Awards.

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.

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