- The Australian Consumer Law (ACL) will apply to Developer sales to consumers.
- Contract terms will be open to review against a test of unfairness. Unfair terms will be void.
- The ACL will not generally apply to investment purchases and business to business sales are not regulated.
- Developers and project financiers need to review contracts and consider transitional impacts for existing contracts, including pre-commitments for current projects.
The Trade Practices Amendment (Australian Consumer Law) Bill 2009 (ACL) was passed in the Senate on 17 March 2010. The ACL will commence on a date fixed by proclamation or the day after the date that is 6 months after Royal Assent (but commencement cannot be earlier than 1 July 2010). The Bill is currently awaiting Royal Assent.
The ACL has significant implications for Developers selling land and dwellings (including apartments) to consumers. Industry has been waiting to see what amendments the Senate would make to the Bill, particularly in relation to proposals put by Senator Xenophon for the legislation to apply to business transactions to a value of $2 million; to introduce "safe harbours" provisions and changes to the criteria for determining what an unfair contract term is. The Government made some changes but business to business transactions will not be regulated by the unfair contracts regime and there will be no "safe harbours" mechanism allowing standard form contracts to be categorised as not offending the ACL.
Developers selling under standard form contracts face regulation and in many cases conditions that would be considered to be usual for property contracts, particularly off-the-plan contracts, will be at risk of challenge as unfair.
While the ACL is intended to be a unifying piece of legislation in terms of consumer contract regulation, it will not replace all of the State based consumer protection regimes that apply to property transactions. The ACL potentially provides buyers, impacted by unfair contract terms, with a right as a group to relief. So, where one buyer successfully challenges a contract term as being unfair, other buyers may become similarly entitled (without having to be a party to the specific action initiated).
What contracts are regulated?
The ACL regulates consumer contracts for the sale or grant of an interest in land and to an individual whose acquisition of the interest is wholly or predominantly for personal, domestic or household use or consumption.
An interest in land is defined widely. Contracts for the sale of land, including land under community or strata title and land sold "off-the-plan" are regulated if they are a standard form contract.
It is the subjective intention of the buyer that is relevant in determining whether the acquisition is wholly or predominantly for personal, domestic or household use or consumption.
The ACL will apply to the sale of lots in a project to purchasers who are acquiring with the intention of residing or occupying the lot as their place of residence. Sales for investment purposes won't be regulated as a consumer contract.
Consequence of Regulation
If a contract is a consumer contract, a term of that contract will be void if:
- the term is unfair; and
- the contract is a standard form contract.
The contract will continue to bind the parties to the extent that the contract is capable of operating without the unfair term.
Developers need to ensure their contracts contain severance clauses and that consideration is given when drafting provisions to how the omission of clauses could impact on the enforcement of the contract. If the contract cannot be given effect without an unfair term, then the parties will not be bound by the contract. This has significant consequences for drafting of clauses that "collect" groups of rights and obligations in one place in a contract.
What are standard form contracts?
The ACL does not provide a specific definition of standard form contract. If a buyer asserts that a term is in a standard form contract, (and is unfair), the seller carries the onus of proving the contract is not a standard form contract.
A Court may take into account such matters as it thinks relevant in assessing whether a contract is a standard form contract. However a Court must take into account:
- whether one of the parties has all or most of the bargaining power relating to the transaction
- whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties
- whether another party was in effect required to either accept or reject the terms of the contract (other than certain terms that are excluded by the ACL from challenge as unfair) in the form in which they were presented
- whether another party was given an effective opportunity to negotiate the terms of the contract (other than certain terms that are excluded by the ACL from challenge as unfair)
- whether the terms of the contract (other than certain terms that are excluded by the ACL from challenge as unfair) take into account the specific characteristics of another party or the particular transaction
- any other manner prescribed by regulation (there are no current prescribed matters).
Developers will generally seek a level of uniformity of conditions both to simplify administration and project delivery but also to satisfy financiers' pre-commitment requirements and general desire to see limited scope for negotiation of contracts on an individual basis. If uniformity is to be retained, there will need to be an increased focus on 'balance' in the terms of contracts, particularly those that preserve discretionary or unilateral rights to the Developer.
If there is an opportunity for review of contract terms Developers should ensure any negotiations are recorded and undertaken in good faith.
What are unfair contract terms?
A term of a consumer contract that is a standard form contract will be unfair if:
- it would cause significant imbalance in the parties' rights and obligations arising under the contract, and
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the terms, and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
The ACL allows a court to take into account such matters as it considers relevant in assessing whether a term is unfair but the court must take into account the extent to which a term is transparent and the contractual context as a whole.
A term will be transparent if the term is expressed in reasonably plain language, is legible, presented clearly and readily available to any party affected by the terms. Accordingly, the way in which contracts are drafted is likely to play a significant part in any assessment of the fairness of the contracts terms and Developers need to ensure their documentation is clear and well structured.
An assessment of the balance between the parties under a contract involves not only the term being considered but the contract as a whole. So a particular provision cannot be looked at in isolation from its contractual context. For Developers this means that clauses reserving discretions to make changes to a project or to determine matters unilaterally must be balanced by other provisions (for example, to make further disclosure or to limit permitted changes to minor variations or to ensure replacement items are of an equivalent quality).
The word significant when considered in a similar legislative context by the courts has been noted as carrying a quantitative element and, in the view of the Court, would mean principally "significant in magnitude" or "sufficiently large to be important". The Court has also noted that this is a concept that is not too far from the concept of "substantial". So, if a Court is looking at the entire contract, to assess balance between the parties reflected in a term, it may well be looking at whether lack of transparency or imbalance in the terms as a whole is material or substantial – as minor or immaterial impacts would be arguably unlikely to create an imbalance (on their own) of "significance".
Most Developer contracts are weighted towards the Developer in terms of timeframes, the ability to make certain changes during development that could impact on (within limits) the property sold and as to other development rights considered necessary for the establishment and implementation of a project. As far as is possible, this weighting needs to be done in a manner which is not disproportionate to the need for protection and flexibility.
Reasonably necessary to protect legitimate interests
The second limb of the test of unfairness relates to whether the relevant term is necessary to protect the legitimate interests of the party advantaged by the terms.
It is reasonable to anticipate, given the nature of projects and Developer sales contract conditions (and off-the-plan sales conditions in particular) that defences to a claim of unfairness will focus on provisions being reasonably necessary to protect the legitimate interests of the Developer. The onus of proof will fall upon the Developer to prove that a term it is seeking to rely upon is reasonably necessary to protect its legitimate interests.
This will bring into play the context in which developments are undertaken and the broader transactional context (not just the terms of the contract). For example, a multi storey, mixed use or apartment project will often involve significant construction time, a large investment in terms of construction and financing costs and requirements for pre-commitments from project financiers or investors. In addition, such projects will often be constrained by the requirements of authorities, some of which will be known prior to marketing but in many cases there may be a need to change or alter projects to accommodate the subsequent requirements of assessing or other authorities. Further, between point of sale and settlement there may be a number of changes to the general market and environment which have consequences for both the Developer and the buyers in such a project, those changes being beyond the control of either party to the contract.
Developers should consider outlining their legitimate interests and the need for terms that address such interests in the contract and doing so in a clear and unambiguous way that is easily accessible to the buyer. As noted, clauses that preserve discretions or unilateral rights should not be so broad as to eliminate any benchmarks for the Developer's obligations. Overly broad provisions have already been attacked on the basis that they may make the contract as a whole illusory and this line of argument may now be reinforced by the ACL tests for unfairness.
The third requirement for assessment of unfairness is whether detriment would be caused to a party if the term was relied upon.
On its face there is no requirement that the detriment be material; however, the Explanatory Memorandum indicates that the likelihood of detriment occurring must be real and not hypothetical.
There is a definition of "rely on" which includes any attempt to enforce the term or exercise a right conferred or purportedly conferred by the term of the contract. A Developer seeking to exercise a discretionary right given to it under a term of a contract would be taken to be relying upon that term of the contract. This also highlights the potential for enforcement provisions (for example a no objection to changes clause) to be also limited even though the clause may be separate from the clause challenged as being "unfair".
Examples of unfair terms
The ACL lists a number of examples of the kinds of contract terms that might be unfair. The list is not exhaustive and does not of itself mean that these types of clauses will be unfair in any particular context – that remains a matter for assessment by the Court and for the respondent to an application (the Seller) to disprove.
The examples include terms that:
- Permit one party (but not the other) to:
- avoid or limit performance of the contract
- terminate the contract
- vary the terms of the contract
- vary the upfront price payable under the contract without the consumer being able to terminate it
- renew or not renew the contract
- vary the characteristics of the interest in land sold or granted under the contract
- unilaterally determine whether the contract has been breached or to interpret its meaning
- limit vicarious liability for its agents
- assign a contract to a third party to the detriment of the other party without their consent
- limit the right of one of the parties to sue the other party
- limit the evidence that one party can adduce in proceedings relating to the contract or to impose the evidential burden on one party in proceedings.
- Penalise a party for breach or termination of the contract. In this context arguably even a genuinely compensatory provision (like default interest) will be of the nature of a penalty for non-performance.
Many commonly used contract terms in Developer contracts cover ground similar to the examples listed, including in relation to default provisions, project changes, limits on termination rights, releases and indemnities, and other "no objection" type clauses.
Terms that are not unfair
The terms of a contract that cannot be considered to be unfair are terms that:
- set the upfront price payable under the contract, or
- define the main subject matter of the contract, or
- are terms required, or expressly permitted, by a law of the Commonwealth or a State or Territory.
The upfront price payable under the contract is the purchase price (inclusive of the deposit). However, the upfront price doesn't include any other consideration that is contingent on the occurrence or non-occurrence of a particular event. For example, it wouldn't include any interest payable by the buyer under a contract if the buyer fails to complete when required by the contract.
Nor would it include additional payments for variations. It's not uncommon in apartment projects, for variations to be agreed with buyers (for example, in terms of internal finishes) where a special condition provides for the buyer to pay an additional amount to the Developer for costs of undertaking variations. Arguably, where the special condition binds the developer to proceed with the variation (as opposed to giving the buyer an option of considering the cost and determining whether or not to proceed) then such a requirement to pay an additional amount could be drafted to fall within the concept of setting the upfront price payable, not being a contingency.
Subject Matter of Contract
In an "off the plan" context Developers will need to consider carefully how they define the subject matter of the contract – "what is sold". Provisions that allow a Developer to make changes to the property sold (as is commonly the case in off-the-plan sales) might be attacked as being unfair terms. As far as possible, when defining what is sold under the contract, the property should be described as the property confirmed by the final survey plan and with completed finishings even if it is initially shown indicatively in initial disclosure plans attached to the contract.
It remains to be seen whether an attack on a clause that allows a Developer to change elements of the property (size, finishes etc) could be resisted by expressing "what is sold" as the end result of determinations or exercise of rights reserved to the Developer. In any case, the fundamental requirement that there be sufficient certainty as to what is sold to form a contract will still need to be met and drafters will need to take care not to create uncertainties by trying to mitigate the application of the ACL.
Terms Required Under Legislation
There may be terms expressly required in different State jurisdictions which will fall within the category of terms required or expressly permitted to be included in a contract. For example, some State jurisdictions expressly provide for a limit on sunset dates for delivery of title and in drafting contracts it will be necessary to establish whether those terms are required or expressly permitted as their inclusion could provide protection from challenges to the validity of terms in contracts. The reference to "expressly permitted" suggests a legislative permission is required, not just the lack of prohibition.
Application to current contracts
Developers also have to consider the effect of any further disclosure required under State legislation. If materials disclosed initially are deemed to form part of the contract then mandatory further disclosure in relation to those materials under State legislation could effect a variation of the contract triggering the application of the ACL. Developers with current projects and sales that are still to settle should consider whether there is a need to accelerate any further disclosure under State based regimes before the commencement of the ACL.
The ACL will not apply to existing standard form contracts unless they are renewed or varied after commencement (not before 1 July 2010). If a Developer has subsisting pre-sales contracts it will need to consider very carefully any variations to the terms of those contracts after commencement. Any new standard form contract entered into on or after that date will be covered by the ACL and need to be considered in that context.
What should Developers do now?
- Review contracts to minimise the risk of a challenge to one or more terms as being unfair. This means looking at the document as a whole, the balance of the terms and paying particular attention to clauses that preserve discretions or unilateral rights to the seller.
- Review contracting procedures to maximise the prospect that a Court will find that the terms were negotiated or to document negotiation as this will still be relevant to the overall contractual context and whether terms are unfair in that context.
- Keep detailed reasons why terms were included in contracts to provide the necessary justification for the term and consider incorporating outlines and acknowledgments as to these matters in pre-contract disclosure and the contract itself.
- Review terms which could be seen to operate in an unbalanced way to the detriment of the other party. Where a term is considered to be weighted in favour of the seller, an assessment should be made as to whether that weighting supports a legitimate interest of the seller and where necessary that interest should be identified in the contract.
- Consider whether mandatory further disclosure required under State legislation could trigger the application of the ACL after it commences.
- Consider the implications for variations to any existing contracts before agreeing to make a change after commencement (i.e. at the earliest 1 July 2010).
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.