On 17 March 2010 the Australian Parliament passed a bill amending the Trade Practices Act 1974 (Cth) (TPA) to include, among other things, a prohibition on "unfair" contract terms in standard form consumer contracts. Similar amendments have been made to the Australian Securities and Investment Act (Cth) 2001 insofar as standard from consumer contracts relating to financial services are concerned.
The amendments, expected to come into force from 1 July 2010, are the first step of a two stage process which will result in uniform consumer protection laws across Australia. The second stage, expected to be implemented from 1 January 2011, will see the name of the TPA change to the Competition and Consumer Act 2010 and will result in the replacement of existing Commonwealth, State and Territory consumer protection laws with a unified Australian Consumer Law.
Unfair Contract Terms – the prohibition
From 1 July 2010 unfair terms in standard form consumer contracts will be prohibited. Businesses which deal with consumers will need to review their standard form consumer contracts to ensure that they do not contain any unfair terms, or risk being unable to rely on or apply those terms.
The prohibition on unfair contract terms applies to consumer contracts which are standard form contracts. A term of a standard form consumer contract will be void if it is an unfair term. This means that a party will not be able to rely on or apply that term (although the remainder of the contract will remain in force if it is capable of doing so without the unfair term).
A consumer contract is a contract for supply of goods or services or for the sale or grant of an interest in land, to an individual whose acquisition is wholly or predominately for personal, domestic or household use. Examples of consumer contracts are numerous and varied and include contracts for the purchase of goods such as furniture, white goods, and jewellery and contracts for the provision of services such as travel, household maintenance, telephone, electricity and software.
What is an "unfair" contract term?
The legislation defines unfair contract terms in general terms and provides a non-exhaustive list of the types of terms which may be unfair. An unfair contract term is one which:
- would cause a significant imbalance in the rights and obligations of the parties if applied or relied upon (or is attempted to be relied upon or applied or assertions of reliance /application)
- is not reasonably necessary to protect the legitimate rights of the advantaged party.
There is a presumption that a term is not reasonably necessary to protect legitimate interests of the party relying on it unless proven otherwise.
How can you determine whether a term is unfair?
The legislation provides that a Court can take anything into account when determining whether a term is unfair but must take into account certain factors including:
- the extent to which the term would cause detriment (financial or otherwise) if relied on or applied;
- the extent to which the term is "transparent". "Transparent" is defined as :
- expressed in reasonably plain language; AND
- legible; AND
- presented clearly; AND
- readily available to any party affected by the transaction
- the contract as a whole.
Examples of terms which may be considered "unfair"
Examples of terms which may be unfair are included in the legislation. They are examples only and are not an exhaustive list. They may be added to only where the Government has considered the detriment that such a term may cause, the impact on business of adding the term to the list and the public interest
The terms which are currently listed as potentially unfair terms are terms where one party only:
- can avoid or limit performance under the contract;
- can unilaterally terminate the contract;
- is penalised for breach of the contract;
- can vary the contract;
- can renew or decide not to renew the contract;
- can vary the "upfront price" without the other's consent;
- can vary characteristics of goods or services without consent;
- can determine whether there has been a breach of the contract or interpret the contract.
Other possibly unfair terms are terms which limit one party's:
- vicarious liability for the acts and omissions of its agents;
- right to assign to detriment of the other without consent;
- right to sue;
- right to adduce evidence in proceedings; and
- evidentiary burden under the contract; 3.
The law will only apply to contracts entered into after commencement (expected to be 1 July 2010) but it WILL APPLY to renewed or varied contracts where the renewal or variation occurs after that date.
What happens if a standard form consumer contract contains an unfair term?
Unfair terms will be void and unenforceable.
A Court can declare terms to be unfair on an application by a party to the contract or the Australian Competition and Consumer Commission (ACCC), or the Australian Securities and Investment Commission (ASIC) in the case of financial services.
Who is at risk?
Any business which deals with consumers and which uses standard form contracts may be at risk of having an unfair term in those contracts.
Businesses which trade online and rely on "click wrap' terms may be particularly at risk, even if the business trades off-shore but enters into contracts with Australian consumers. Similarly, businesses which may rely on terms and conditions in standard form contracts which have been drafted by their overseas parent companies should take particular care to ensure that their contracts comply. Notwithstanding that a business may have expressed the law of the contract to be another jurisdiction, if a business is found to be "carrying on business in Australia" the prohibition will apply.
What should business be doing?
As a first step, businesses should review their standard form consumer contracts to determine whether they contain any of the terms listed in the legislation as being possibly unfair. Although expressed only to be an indicative list of possibly unfair terms, it is safe to assume that, unless a business can determine to a Court's satisfaction that such terms are reasonably necessary to protect their legitimate interests, such terms will almost certainly be found to be unfair.
Where the assessment is made that such terms are unlikely to be found, on an objective test, to be reasonably necessary to protect the business' legitimate interests, business should consider the replacement of such terms with compliant terms, in order to avoid possible investigation and challenge by the ACCC and/or challenge by consumers.
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.